Arcadia Biosciences, Inc. — 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report, not a standalone fourth-quarter report; it does not provide a clear set of Q4-only financial results. Financial figures below are in U.S. dollars unless stated otherwise.
Business context and reporting period
Arcadia is an agricultural biotechnology trait developer. Its programs target crop yield and resilience to stresses such as drought, heat, nutrient deficiency, and salinity, as well as crop nutritional and quality improvements. Its commercial product is SONOVA safflower oil containing gamma linolenic acid (GLA); most agricultural traits remain in development and are advanced with licensees and joint-venture partners.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $3.188 million | $5.414 million |
| Product revenue | $669,000 | $466,000 |
| License revenue | $144,000 | $1.216 million |
| Contract research and government grants | $2.375 million | $3.732 million |
| Operating expenses | $21.808 million | $20.977 million |
| Loss from operations | $(18.620) million | $(15.563) million |
| Net loss | $(19.624) million | $(17.956) million |
| Net loss per share, basic and diluted | $(0.44) | $(0.73) |
| Cash used in operating activities | $17.055 million | $15.109 million |
- Total revenue fell about 41%. Product revenue rose about 44%, but license revenue declined about 88% and contract research and grant revenue fell about 36%.
- Product cost of revenue was $895,000 against $669,000 of product revenue, a product gross loss of $226,000 (approximately negative 34% gross margin).
- R&D expense was $8.663 million, down 3%; SG&A was $12.250 million, up 10%, primarily reflecting $1.2 million of severance expense.
- Interest expense declined to $1.319 million from $2.658 million, mainly following refinancing; 2015 also included a $230,000 debt-extinguishment loss.
- At year-end, cash and cash equivalents were $2.013 million, short-term investments $48.547 million, and long-term investments $2.498 million. Working capital was $49.093 million. Total assets were $56.574 million and stockholders’ equity $22.198 million.
- Debt was $25.127 million, compared with $24.930 million at year-end 2015. The $25 million senior secured loan bears interest at prime plus 0.90%; interest-only payments run through December 2017, followed by 36 monthly principal installments, with maturity on December 1, 2020 and a $600,000 end-of-term payment.
- Accumulated deficit was $151.550 million. Management said available cash, cash equivalents, and short-term investments would fund anticipated requirements for at least the next 12 months; it also said additional financing may be needed.
Material changes versus 2015
- Revenue composition shifted further toward product sales and contract/grant work, while license revenue dropped following delayed estimated launch dates for several licensed yield traits and reduced amortization of deferred license fees.
- Contract research and grant revenue declined as certain contracts ended in 2015 and existing activities wound down in 2016.
- Operating loss widened by about 20% and net loss by about 9%, despite lower interest expense. The lower 2016 loss per share partly reflects the larger weighted-average share count after the 2015 IPO and the absence of 2015 preferred-stock accretion and deemed dividends.
- Operating cash use increased by about 13%. Cash and cash equivalents declined substantially, while the company held most year-end liquid resources in investments.
- A fourth-quarter strategic review led to program prioritization, workforce reductions of 23 positions, and plans to close the Seattle research office. Management reported $192,000 of one-time employee termination benefits and $224,000 of executive severance costs in 2016.
Outlook, management commentary, risks, and unusual items
- Management is prioritizing SONOVA expansion, non-GM wheat quality and yield products, and partner programs in corn and soybeans. It cautioned that commercialization of agricultural yield traits remains years away and that significant development and testing remain.
- Arcadia said it did not expect product-sale revenue beyond SONOVA for at least three to five years. It reported no value-sharing revenue from commercialized seed traits to date.
- Regulatory delays are a major risk. The company estimated that delays in Indian GM field-trial approvals could add at least two to three years to Mahyco partner timelines. Verdeca’s HB4 soybean trait had Argentine approval; U.S. and China applications were submitted in 2016 and remained under review. Further applications were planned for Brazil in 2017 and the EU in 2018.
- In January 2017, the FDA accepted Arcadia’s GRAS notification for SONOVA GLA oil use in medical foods and nutritional beverages. A separate dog-food petition was pending; management expected a decision in Q1 2017.
- Management expected a cashless exchange with Limagrain involving its interest in Arcadia and Arcadia’s interest in Limagrain Cereal Seeds to close in late March 2017, but stated there could be no assurance it would be completed.
- The loan agreement requires a liquidity ratio of at least 1.4:1.0, defined as cash, cash equivalents, and net accounts receivable divided by the bank obligation, or cash collateral equal to 100% of the obligation. The filing does not clearly state the company’s covenant-compliance status or explain how its investment balances affect compliance.
- A $3.0 million noncurrent liability relates to contingent payments from the 2005 Anawah acquisition, payable from specified future product revenue. The timing and ultimate payment amount are uncertain.
- On February 14, 2017, Nasdaq notified Arcadia that it was below the minimum bid-price requirement and provided a cure period through August 14, 2017. The separate independent-director compliance matter had been resolved in November 2016.
- Arcadia reported no material litigation. Government grant revenues are subject to routine audits; the filing says audits were in process and management anticipated no adverse result. The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective, while noting certain control deficiencies that were not individually or collectively significant deficiencies or material weaknesses.
Important facts for investors to verify
- Liquidity runway and financing plans, including reconciliation of management’s runway statement with operating cash burn and the substantial year-over-year decline in cash.
- Compliance with the bank’s 1.4:1.0 liquidity covenant, any waiver or cash-collateral requirement, and the treatment of investments under the covenant definition.
- Progress toward regulatory approvals and commercial launch for HB4 soybeans and other partner-led traits, particularly in India, the United States, China, and Brazil.
- Actual sales growth, product-level profitability, customer concentration, and whether the FDA GRAS development produces meaningful SONOVA demand; also confirm the status of the dog-food petition.
- Whether the Limagrain transaction was completed and its effects on Arcadia’s ownership, obligations, and wheat strategy; assess the $3.0 million Anawah contingent liability and potential milestone and royalty commitments.
- Nasdaq bid-price compliance by the August 14, 2017 deadline, along with dilution exposure from equity awards and any future financing.