Arcadia Biosciences, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Financial statement amounts are in thousands of dollars, except per-share data. The company develops agricultural traits and food ingredients using gene editing and breeding; commercial product revenue to date has been limited primarily to SONOVA products.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $214 | $1,018 | Down $804 (79%) |
| Operating expenses | $4,053 | $4,981 | Down $928 (19%) |
| Operating loss | $(3,839) | $(3,963) | Loss narrowed $124 |
| Net loss | $(10,615) | $(4,216) | Loss increased $6,399 |
| Net loss per share | $(4.86) | $(1.90) | — |
| Operating cash flow | $(2,617) | $(4,530) | Cash use decreased |
- Revenue consisted of $61 product sales, no license revenue, and $153 contract research and government grants. Product revenue fell 70%, principally due to order timing; contract research and grant revenue fell 78%, mainly because a grant and a short-term research contract completed in 2017. No new license agreements were executed in Q1.
- Operating expenses declined, including R&D by 23% to $1,396 and SG&A by 14% to $2,621. Product cost was $36 against $61 of product revenue, an approximate product gross margin of 41%.
- Net loss included $4,000 of initial noncash loss on warrant and share-adjustment liabilities, $1,900 of subsequent fair-value loss, and $904 of offering costs allocated to those liabilities. These financing-related charges explain much of the year-over-year increase in net loss.
- Cash and cash equivalents were $20,418 at March 31, compared with $9,125 at year-end; short-term investments were zero, versus $3,898 at year-end. Cash rose by $11,293 during the quarter, including $10,000 gross proceeds from the private placement. Investing cash inflow of $3,876 primarily reflected investment maturities.
- Total assets were $22,599 and total liabilities $21,932, leaving stockholders’ equity of $667. There was no long-term debt at quarter-end. Liabilities included $9,900 of warrant liabilities and $6,000 of share-adjustment-feature liabilities, both Level 3 fair-value estimates, plus a $3,000 contingent liability related to the Anawah acquisition.
Material changes and financing
- The company adopted ASC Topic 606 on January 1, 2018 using the modified retrospective method. Adoption reduced opening accumulated deficit by $2,371 and unearned revenue by the same amount; Q1 revenue was reduced by $82 under the new standard. Up-front license fees are now generally recognized upon agreement execution rather than over the development period.
- On March 22, the company closed a private placement for $10.0 million gross proceeds. Net proceeds were reported as $8.7 million after transaction costs. The initial shares and warrants, and their price-adjustment provisions, generated substantial derivative liabilities and noncash charges.
- Subsequent to quarter-end, the private-placement adjustment terms increased shares issued from 300,752 to 1,201,636 and warrant shares from 300,752 to 1,282,832; the warrant exercise price was reduced to $10.7258, as stated in the filing. These post-quarter changes were not reflected in the March 31 financial statements and create significant dilution risk. Shareholders approved the issuance on May 2.
- The company completed repayment of its $25 million term loan in July 2017. Q1 2018 had no interest expense, compared with $339 in Q1 2017.
Outlook, risks, and other matters
- Management said existing cash, cash equivalents, and investments should fund operations for at least 12 months from issuance of the statements. The filing gives no formal revenue or earnings guidance. The company may seek further debt or equity financing, partnerships, or grants; additional equity could dilute shareholders.
- Management expects contract research and government-grant revenue to decline over the next 12–36 months as current projects conclude and are not replaced. It expects future revenue from nutrition and quality products, but commercialization timelines remain uncertain; certain trait commercialization is estimated at two to seven years.
- Regulatory delays, including in India, have slowed development and commercialization of genetically modified traits. The company is reallocating resources toward nearer-term non-GM nutrition and quality products while continuing to support partners’ regulatory programs.
- Other risks include ongoing losses and cash consumption, dependence on future financing, agricultural seasonality and weather, variable grant and milestone timing, and valuation uncertainty in the Level 3 financing liabilities. The company noted a possible ownership change under IRC Section 382 that could limit use of net operating loss carryforwards.
- The company reported no material litigation, no long-term debt, and effective disclosure controls and procedures.
Key facts for investors to verify
- Reconcile the private-placement share and warrant adjustments, final exercise price, transaction costs, and resulting dilution after May 8.
- Assess the assumptions and sensitivity behind the $15.9 million Level 3 warrant and share-adjustment liabilities and related earnings charges.
- Track cash burn against management’s stated 12-month liquidity outlook, including any new financing or spending changes.
- Monitor progress and timing of regulatory approvals, partner commercialization, and the company’s planned nutrition-product scale-up.
- Evaluate whether declining grant and contract revenue can be offset by product or licensing revenue, given the limited current commercial sales base.