Arcadia Biosciences, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unless otherwise noted, financial amounts are in millions of dollars. Arcadia is an early-stage agricultural food ingredient company developing nutritional crop traits and crop-productivity technologies. It reported limited product revenue, primarily from SONOVA, and has not generated material commercial-product revenue.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $0.436 | $0.991 | $0.650 | $2.009 |
| Operating loss | $(4.578) | $(3.737) | $(8.417) | $(7.700) |
| Net loss | $(6.669) | $(4.006) | $(17.284) | $(8.222) |
| Net loss per share | $(2.02) | $(1.88) | $(6.29) | $(3.77) |
| Operating cash used | — | — | $(6.918) | $(8.917) |
Revenue mix: Q2 product revenue was $0.188 million, license revenue $0.090 million, and contract research and government grants $0.158 million. For the six months, the respective amounts were $0.249 million, $0.090 million, and $0.311 million. Product costs exceeded product revenue by $0.083 million in Q2 and $0.058 million for the six months; Q2 costs included a $0.177 million inventory write-down.
Balance sheet and liquidity: At June 30, cash and cash equivalents were $9.667 million, short-term investments $18.931 million, and total current assets $29.966 million. Current liabilities were $2.923 million. Total liabilities were $23.002 million, including $17.079 million of Level 3 warrant liabilities; the filing reports no long-term debt. Accumulated deficit was $182.170 million and stockholders’ equity $8.130 million. Management said existing cash, cash equivalents, and investments should fund operations for at least 12 months from issuance of the statements.
Operating cash use improved by $1.999 million year over year, while cash and cash equivalents rose $0.542 million during the first half. Investing activities used $15.067 million, mainly reflecting purchases of short-term investments; financing activities provided $22.527 million. March and June 2018 equity-and-warrant transactions generated $24.0 million gross proceeds and approximately $21.5 million net proceeds after stated cash offering costs.
Changes versus prior comparable periods
- Q2 revenue declined 56% and first-half revenue declined 68%. Contract research and grant revenue fell 77% in Q2 and 78% for the first half, principally because a prior-year short-term contract and several government grants were not repeated.
- First-half product revenue declined 38%, mainly because of a large distributor order in 2017. License revenue declined 57%, reflecting the adoption of ASC Topic 606 and the absence of revenue from amortizing previously collected upfront fees.
- First-half operating expenses fell 7%, but operating loss worsened 9% as revenue declined. Net loss more than doubled, reflecting financing-related accounting charges and offering costs, partly offset by lower expenses and the absence of prior-year interest expense.
- Debt was repaid in July 2017; accordingly, there was no interest expense in the 2018 periods, versus $0.365 million in Q2 2017 and $0.704 million in the first half of 2017.
Outlook, commentary, and notable items
- Management is shifting resources toward near-term commercialization of nutritional ingredient traits, including GoodWheat resistant-starch wheat, while continuing development and commercialization efforts for crop traits such as HB4 soybean. Proceeds from the offerings are intended to support production scale-up, seed production, commercialization, research and development, and general corporate purposes.
- The company expects contract research and government-grant revenue to decline over the next 12–36 months as current work concludes and is not replaced. Management describes commercialization of its crop traits as generally four to seven years away; it also says products arising from certain contract research may generate revenue in two to four years.
- ASC Topic 606 adoption reduced opening accumulated deficit by $2.371 million, with a corresponding reduction in unearned revenue. The new standard reduced reported 2018 revenue by $0.082 million for Q2 and $0.164 million for the first half compared with the prior accounting method.
- Financing produced substantial noncash and valuation-related charges: a $4.0 million initial loss on March placement liabilities, $2.435 million of net fair-value losses for the first half, and $2.543 million of reported offering costs. Warrant liabilities are valued using Level 3 assumptions and remain subject to remeasurement.
- Risks include delays in regulatory approvals for genetically modified traits, uncertain product commercialization and funding needs, potential dilution or debt restrictions if more capital is required, and seasonality and weather impacts on field trials. A USPTO interference proceeding with Arista over resistant-starch wheat patent priority was pending; initial motion rulings were not expected until late 2018, with a possible final decision in late 2019 or early 2020.
- The filing reports no material litigation other than the described patent proceeding, no long-term debt, and effective disclosure controls. Management cautions that further financing may be needed if current resources prove inadequate.
Important facts for investors to verify
- Whether the company’s cash and short-term investments support its commercialization plans and stated 12-month liquidity outlook, given first-half operating cash use of $6.918 million.
- Progress, costs, and expected timing for GoodWheat resistant-starch production scale-up and commercialization, and for HB4 soybean regulatory approval.
- Developments in the Arista patent interference and any effect on the company’s ability to protect or commercialize resistant-starch wheat.
- The terms, potential dilution, cash-payment features, and subsequent fair-value changes of the warrants; $17.079 million was recorded as a warrant liability at quarter-end.
- Whether falling contract research and grant revenue is offset by product and licensing growth, and whether the $0.177 million SONOVA inventory write-down signals further demand or inventory risk.