Arcadia Biosciences, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unless otherwise noted, financial amounts below are in U.S. dollars. Arcadia develops agricultural and food-ingredient traits using gene-editing and breeding technologies; its commercial focus includes GoodWheat products and crop productivity traits.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $158,000 | $214,000; down 26% |
| Product revenue | $107,000 | $61,000; up 75% |
| Contract research and grant revenue | $51,000 | $153,000; down 67% |
| Operating expenses | $4.376 million | $4.053 million; up 8% |
| Operating loss | $4.218 million | $3.839 million |
| Net loss | $12.612 million | $10.615 million |
| Net loss per share, basic and diluted | $2.64 | $4.86 |
| Cash used in operating activities | $3.969 million | $2.617 million |
- Product gross profit was approximately $48,000, or 45% of product revenue, based on reported product revenue and cost of product revenue.
- At March 31, cash and cash equivalents were $10.438 million and short-term investments were $7.355 million, totaling $17.793 million. Total current assets were $18.565 million and current liabilities were $2.968 million.
- Total assets were $21.950 million, total liabilities $21.317 million, and stockholders’ equity $633,000. The filing reports no conventional borrowings; liabilities included $13.578 million of warrant liabilities and $2.345 million of operating lease liabilities.
- Cash declined $1.560 million during the quarter. Investing activities provided $2.422 million, mainly reflecting investment maturities net of purchases; financing activities used $13,000.
Material changes and unusual items
- Revenue mix shifted toward product sales: SONOVA product revenue increased, while contract research and government grant revenue declined as projects concluded and grant activity fell.
- Research and development expense rose 8%, primarily due to Verdeca-related spending, partly offset by lower employee costs. Selling, general and administrative expense rose 7%, mainly reflecting the commercial development team.
- The $12.612 million net loss included an $8.495 million noncash expense from remeasuring common-stock warrant liabilities, driven by an increase in the company’s stock price. The warrant liability increased from $5.083 million at year-end 2018 to $13.578 million at quarter-end. This fair-value charge was the principal reason the net loss exceeded the operating loss.
- Net loss per share was lower than in Q1 2018 despite the larger net loss, as the weighted-average share count increased substantially and the prior-year quarter included initial warrant-related and offering-cost losses.
- Adoption of the lease accounting standard in 2019 resulted in recognition of a $2.193 million right-of-use asset and $2.345 million lease liability. Net lease cost for the quarter was $208,000.
Outlook, risks, and contingencies
- Going concern: Management stated that existing cash, cash equivalents, and investments would not be sufficient to meet anticipated cash requirements for at least the next 12 months, raising substantial doubt about the company’s ability to continue as a going concern. The filing says additional debt, equity, or partner funding may be needed. If funding is unavailable on acceptable terms, Arcadia may have to cut spending, delay supplier payments, liquidate assets, or curtail development programs.
- Management expected GoodWheat products to be marketed in the latter part of 2019. It also said contract research and grant revenue was expected to decline over the next six to 15 months as existing work concludes, while commercialization-related SG&A was expected to increase.
- Arcadia established Arcadia Specialty Genomics in February 2019 to pursue crop improvements in cannabis, including hemp. It planned to obtain required licenses and begin research and pilot programs; timing and commercial prospects remain uncertain.
- Commercialization, regulatory progress, field-trial results, weather, and crop-growing seasons may affect timing and revenue. The filing emphasizes that the company has never been profitable and expects substantial spending before meaningful revenue from products incorporating its traits.
- A $3.0 million noncurrent contingent liability remains related to the Anawah acquisition and potential future commercial sales from specified development programs.
- Arcadia’s lawsuit concerning alleged misuse of an invention was dismissed in January 2019; claims against certain defendants were dismissed with prejudice, and the claim against another defendant was dismissed without prejudice. The case is closed.
Important facts for investors to verify
- Whether Arcadia obtains sufficient financing to address the stated going-concern uncertainty, and the resulting dilution, debt burden, or operating restrictions.
- Progress and timing of GoodWheat commercialization, including production scale-up, customer demand, and whether anticipated sales generate material revenue.
- Whether declining contract research and grant revenue is offset by product sales, licensing, or commercialization income.
- The valuation and potential cash consequences of the $13.578 million warrant liability, as well as potential dilution from approximately 2.821 million outstanding warrants.
- Cash burn, spending plans, and the potential need to reduce or delay research, development, and commercialization activities.