Arcadia Biosciences, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Financial amounts below are in U.S. dollars; millions are used unless noted. Arcadia develops agricultural biotechnology traits and earns revenue mainly from contract research, government grants, and licenses. Its Sonova safflower oil is its principal commercial product; the company says it does not expect sales of seeds incorporating its traits for at least three to five years.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $1.823 | $1.502 | $4.068 | $4.184 |
| Operating loss | $(4.235) | $(5.943) | $(11.493) | $(13.523) |
| Net loss | $(4.619) | $(7.064) | $(14.099) | $(16.351) |
| Operating cash flow | Not separately provided | Not separately provided | $(11.163) | $(12.129) |
- Q3 revenue grew 21% year over year; nine-month revenue declined 3%. Q3 revenue comprised $1.486 million of contract research and grants, $214,000 of licenses, and $123,000 of product sales.
- Q3 product gross profit was $62,000 (about 50% of product revenue); nine-month product gross profit was $160,000 (about 42%). These figures compare with product costs of $1.795 million in Q3 2014 and $1.932 million for the first nine months of 2014, reflecting a 2014 inventory reserve.
- Operating loss was about 232% of revenue in Q3 and 283% for the nine-month period. The filing does not provide a consolidated gross-margin measure.
- At September 30, cash and cash equivalents were $62.966 million and short-term investments were $11.290 million. Current assets were $76.642 million versus current liabilities of $10.895 million, or approximately $65.747 million of working capital.
- Debt included $19.462 million of secured term loans and $3.639 million of current convertible promissory notes. Derivative liabilities related to the convertible notes were $2.425 million. The term loans are secured by substantially all company assets.
- Accumulated deficit was $128.069 million. The company reported stockholders’ equity of $43.833 million, compared with a deficit of $84.766 million at December 31, 2014.
Material changes and financing
- In May 2015, Arcadia completed its IPO and sold 8.528 million shares at $8 per share, receiving approximately $58.4 million net proceeds. Preferred shares converted into common stock; common shares outstanding were 43.931 million at September 30.
- In April, the company borrowed $20 million under a secured term-loan facility and used proceeds in part to repay its $8 million related-party term note and other promissory notes. The term loan bears interest at the greater of 9% or three-month LIBOR plus 8.74%; interest-only payments run through April 2016, potentially extendable to October 2016, with repayment due by November 1, 2018. A $0.6 million end-of-term payment is also due.
- Interest expense increased 92% to $2.008 million for the nine months, primarily due to the new term loan. SG&A rose 5% year over year for the period, partly reflecting public-company costs and stock compensation.
- Cash increased by $46.395 million in the first nine months, principally because of IPO and debt proceeds; operating activities used $11.163 million and investing activities used $11.370 million, mainly for short-term investments.
Outlook, risks, and unusual items
- Management said available cash and cash equivalents at September 30 should fund anticipated cash requirements for at least 12 months. It may seek additional debt, equity, partnership funding, or grants; additional equity could dilute shareholders and debt could add covenants.
- No specific revenue or earnings guidance is provided. Management expects R&D spending to increase over the foreseeable future and anticipates continued losses while traits are developed. It describes commercialization timelines as long and uncertain.
- Revenue is exposed to uneven milestone timing, grant awards, contract research schedules, crop seasons, weather, regulatory review, and customer ordering patterns. Contract research and grants supplied 72% of nine-month revenue; product sales remain limited.
- Key risks include failure or delay in field trials, regulatory approvals, or commercialization; dependence on collaborators and government funding; competition, consumer resistance to GM products, and intellectual-property risks. Mahyco may terminate certain agreements on 90 days’ notice.
- The loan agreement includes quarterly revenue or minimum-cash covenants; Arcadia reported compliance at September 30. The filing says the company’s $3 million Anawah-related contingent liability remains appropriate while it pursues three development programs. Separately, its 35% investment in Limagrain Cereal Seeds was reduced to zero after recognized equity-method losses; the venture had $17.8 million of debt due January 2016, with extension expected by the company but not assured.
- The company reported no material litigation and no defaults upon senior securities. Management concluded disclosure controls were effective at the reasonable-assurance level. The filing also warned that the IPO lock-up was due to expire November 10, 2015, potentially increasing shares available for trading.
Important facts for investors to verify
- Whether cash burn, grant and contract revenue, and development spending remain consistent with management’s stated 12-month liquidity expectation.
- Term-loan covenant compliance, interest costs, repayment schedule, and any changes to collateral or lender rights.
- Progress, trial results, regulatory milestones, and partner commitment for the company’s late-stage traits, including soybean and wheat programs.
- Revenue concentration, renewal or termination status of major collaborations, and timing of license milestones and grant funding.
- Potential share-supply effects following the lock-up expiration and the ownership concentration disclosed in the filing.