Arcadia Biosciences, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Dollar amounts are in millions unless stated otherwise. Arcadia develops agricultural traits and nutritional food ingredients; commercial product sales to date were limited primarily to SONOVA products. Its strategy emphasizes bringing non-GM nutrition traits, including GoodWheat resistant-starch wheat, toward commercialization.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $0.370 | $0.589 | $1.020 | $2.598 |
| Operating loss | $(4.099) | $(3.615) | $(12.516) | $(11.315) |
| Net income (loss) | $4.450 | $(4.525) | $(12.834) | $(12.747) |
| Operating cash used | — | — | $(10.936) | $(11.282) |
- Q3 revenue comprised product sales of $0.144 million, license revenue of $0.010 million, and contract research and grants of $0.216 million. Reported gross profit was $0.246 million, or approximately 66% of revenue; for the nine months, gross profit was $0.589 million, approximately 58% of revenue.
- Q3 net income was not driven by operating performance: it included an $8.421 million noncash gain from remeasurement of warrant liabilities. The company still recorded a $4.099 million operating loss. Nine-month results included a $4.0 million initial noncash warrant-related loss, a $5.986 million fair-value gain, and $2.544 million of offering costs.
- Research and development expense was $1.334 million in Q3 and $4.524 million year to date. Selling, general and administrative expense was $3.011 million and $8.581 million, respectively.
- At September 30, cash and cash equivalents were $6.669 million and short-term investments were $17.931 million. Current assets were $26.203 million versus current liabilities of $2.637 million. Stockholders’ equity was $12.922 million; accumulated deficit was $177.720 million.
- No long-term debt was outstanding. Operating cash use was partly offset by $22.480 million of financing cash flow, principally proceeds from the March private placement and June offering. Cash and cash equivalents declined $2.456 million; investing cash flow was $(14.000) million, reflecting net purchases of investments.
Changes versus comparable periods and balance-sheet developments
- Revenue fell 37% in Q3 and 61% year to date. Year-to-date product revenue declined 18%, license revenue declined 72%, and contract research and government grant revenue declined 70% versus 2017.
- Management attributed lower license revenue partly to adoption of ASC 606, which changed recognition of upfront license fees. Adoption increased opening 2018 equity by $2.371 million; ASC 606 reduced 2018 revenue by $0.082 million in Q3 and $0.246 million year to date compared with the prior accounting treatment.
- Operating loss widened in Q3 by $0.484 million and year to date by $1.201 million. R&D expense declined, but lower revenue and higher product costs contributed to the operating shortfall. SG&A rose 25% in Q3, partly due to intellectual-property legal fees and marketing.
- Cash and investments together were approximately $24.6 million at quarter-end, versus approximately $13.0 million at year-end 2017. The company raised $10.0 million gross in March and $14.0 million gross in June. Common shares outstanding rose from 2,134,154 at year-end to 4,774,919 at September 30.
Outlook, risks and unusual items
- Management said existing cash, cash equivalents and investments were expected to fund operations beyond the 12 months following issuance of the statements. It may seek further equity or debt financing, partnerships or grants; equity financing would dilute shareholders, while debt could add servicing obligations and restrictive covenants.
- The company expects contract research and grant revenue to decline over the next 36 months as existing projects conclude and are not replaced. It is shifting resources toward nutrition-ingredient commercialization, including GoodWheat resistant-starch wheat production and scale-up. Management describes commercialization of certain licensed agricultural traits as approximately four to seven years away; contract-research products could produce revenue in as soon as two to four years. These are expectations, not assured outcomes.
- SONOVA inventory was written down by $0.046 million in Q3 and $0.223 million year to date, attributed to reduced forecast GLA sales volume. Management also cited the timing of distributor orders as a source of product-revenue variation.
- Warrant liabilities totaled $8.658 million and were classified as Level 3 fair-value measurements. Changes in the company’s share price materially affected reported earnings. The March and June securities transactions included warrants with contingent cash-payment features, and the filing reports 2,826,687 common-stock warrants outstanding at September 30.
- Arcadia appealed a USPTO decision terminating an interference concerning resistant-starch wheat patent priority; a decision was not expected until the latter half of 2019. Arcadia also disclosed litigation against Vilmorin, Limagrain and Arista concerning alleged unauthorized use of its technology; defendants had filed motions to dismiss and the case was in discovery.
- Other risks include delayed regulatory approvals for GM traits, commercialization and market-adoption uncertainty, intellectual-property disputes, agricultural seasonality and weather exposure, and possible limits on net operating loss use following ownership changes. Management reported disclosure controls were effective at the reasonable-assurance level and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether the reported cash and investment balance and management’s stated runway remain adequate given operating cash use and commercialization spending.
- How much future earnings may be affected by noncash warrant-liability remeasurement, and the potential dilution and contractual terms of the outstanding warrants.
- Whether GoodWheat production scale-up, customer uptake and commercialization milestones proceed as planned, and whether the forecast decline in grant and contract revenue is offset by new product or license revenue.
- The status and potential business impact of the resistant-starch wheat patent appeal and the separate technology-related litigation.
- The amount and timing of SONOVA sales, inventory needs and any further inventory write-downs.