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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Arcadia Biosciences Inc    RKDA

ARCADIA BIOSCIENCES INC

(RKDA)
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ARCADIA BIOSCIENCES : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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08/14/2019 | 05:27pm EDT

Special Note Regarding Forward-Looking Statements


The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements and the related notes to those statements
included herein. In addition to historical financial information, this report
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those discussed in the
forward-looking statements. The statements contained in this report that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Securities Exchange Act of
1934, as amended, or the Exchange Act. Forward-looking statements are often
identified by the use of words such as, but not limited to, "anticipate,"
"believe," "can," "continue," "could," "estimate," "expect," "intend," "may,"
"plan," "project," "seek," "should," "strategy," "target," "will," "would" and
similar expressions or variations intended to identify forward-looking
statements. These statements are based on the beliefs and assumptions of our
management based on information currently available to management. Such
forward-looking statements are subject to risks, uncertainties and other
important factors that could cause actual results and the timing of certain
events to differ materially from future results expressed or implied by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those identified below and those
discussed in the section titled "Risk Factors" included in the most recent
Annual Report on Form 10-K filed by the Company. Furthermore, such
forward-looking statements speak only as of the date of this report. Except as
required by law, we undertake no obligation to update any forward-looking
statements to reflect events or circumstances after the date of such statements.

Solely for convenience, the trademarks, service marks and trade names referred
to in this report may appear without the ®, TM, or SM symbols, but such
references do not constitute a waiver of any rights that might be associated
with the respective trademarks, service marks, or trade names.

Overview




We are a consumer-driven, agricultural food ingredient company. We aim to create
value across the agricultural production and supply chain beginning with
enhanced crop productivity for farmers and ultimately delivering accelerated
innovation in nutritional quality foods to consumers. We use state of the art
gene-editing technology and advanced breeding techniques to naturally enhance
the nutritional quality of grains and oilseeds to address the rapidly evolving
trends in consumer health and nutrition. In addition, we have developed a broad
pipeline of high value crop productivity traits designed to enhance farm
economics.

Consumers are demanding food companies provide healthier, high quality foods,
naturally and sustainably produced with greater ingredient simplicity and
transparency. Now, more than ever, consumers are paying premium pricing to
satisfy their dietary health requirements, such as higher fiber and lower gluten
in grains, healthier oils and fewer processed ingredients. Consumer food
companies recognize this shift but cannot rely upon the legacy ag-supply chain
and traditional crop breeding techniques to meet these demands. Conventional and
transgenic breeding processes can take between nine and 13 years to bring new
food varieties or quality traits to market, causing consumer food companies to
search for alternative means to satisfy the evolving customer demands. The need
for rapid product differentiation at the consumer level has opened up a premium
food market opportunity that is becoming one of the fastest growing segments in
the food industry.

To address this large and growing demand, we are building on our industry
leading scientific expertise and advanced plant breeding and transformation
technologies developed over the past 15 years, to directly edit the plant genome
without introducing foreign DNA, to produce nutrient-dense crops for use in the
major foods we eat. By employing gene editing technology and our TILLING
platform, we believe we can reduce the time to market for novel ingredient
traits by half, thereby providing consumer food companies a steady and reliable
source of cost effective, healthy natural food options.

In 2018, we launched our GoodWheat™ brand, a non-genetically modified (non-GM)
portfolio of wheat products that enables food manufacturers to differentiate
their consumer-facing brands. The brand launch is a key element of the company's
go-to-market strategy to achieve greater value for its innovations by
participating in downstream consumer revenue opportunities. We designed the
brand to make an immediate connection with consumers that products made with
GoodWheat™ meet their demands for healthier wheat options that also taste great.
The GoodWheat™ brand encompasses our current and future non-GM wheat portfolio
of high fiber Resistant Starch (RS) and Reduced Gluten wheat varieties, as well
as future wheat innovations. In October 2018, the U.S. Patent and Trademark
Office granted us a patent for extended shelf life wheat, the newest trait in
our non-genetically modified wheat portfolio. This new trait was designed to
promote whole wheat consumption by improving the shelf life and taste of whole
grain wheat products.

                                       17
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In April 2019, we received two new patents on our high fiber Resistant Starch
wheat, one for bread wheat and one for durum (pasta) wheat. These two patents
have claims that strengthen our intellectual property for our Resistant Starch
portfolio of products.

We expect to market GoodWheat™ products in the latter part of this year.
Increased fiber consumption is well recognized as a way to improve gut health
and to control excessive weight gain. Concurrently, we are developing three
additional wheat varieties, a reduced gluten wheat, an extended shelf life wheat
and a superior yielding wheat. In the American diet, each day more than 500
calories come from wheat products, 25 percent of the FDA's recommended daily
caloric intake for a woman and 20 percent for a man. We believe these varieties
have broad application in the global wheat market which the USDA (US Department
of Agriculture) estimated to be 758 million metric tons for the 2017/2018
production year, which roughly equates to $208 billion farm gate value (i.e.
market value net of selling costs).

In years to come, we expect to achieve enhanced nutritional characteristics within a number of other broad acre crops using advanced breeding and gene-editing techniques. Targets include but are not limited to higher fiber, longer shelf life and enhanced protein in crops other than wheat.


Another aspect of our business is improving farmer productivity through the
development of more robust crop varieties, by developing specific crop traits
designed to counteract the detrimental impact of environmental stresses on
harvest yields. Traditional genetic modification (GM) trait development has
concentrated on crops where the combination of large acreage and high input
costs (such as chemical costs for pest and weed control) create significant
economic value for herbicidal or insecticidal traits. However, far more
deleterious to crop yields are abiotic stresses, such as drought, heat, nutrient
deficiency, water scarcity, and soil salinity, and remains largely unpenetrated
by the GM seed industry today. For example, industry estimates indicate greater
than 80 percent of wheat yield loss and 65 percent of corn yield loss globally
are lost due to abiotic factors. These stresses are prevalent in most
agricultural environments with varying degrees of severity and often have
material consequences on crop production, quality, and farmers' incomes.

We devoted much of our early research to building a comprehensive array of
abiotic stress traits. Furthermore, through out-licensing arrangements with our
commercialization partners, many of our traits have been bred into several
global crops, including rice, wheat, and soybeans, and we have demonstrated
significant yield improvements in multiple years of field testing. However, due
to the global variability in acceptance of GM traits from one territory to the
next, the commercial timing and ultimate value of these innovations is difficult
to predict.

Regardless of the timing and degree of commercial success of our historical GM
traits, the technical achievements they represent has established the company as
a world-class plant transformation organization.

Balancing our near-term revenue goals with long-term value capture, we will continue to provide active support to our commercial partners working to advance our high value traits through development and deregulation for commercialization.


While we seek patent protection on our technologies and traits, we have
structured our commercial agreements so that we receive our percentage of
additional commercial value whether or not patent protection is in effect at any
particular time or place. Nearly all of our agreements provide access to our
traits, and our right to receive a share of commercial value, continue for a set
number of years after products containing our traits are commercialized. While
the exclusive rights afforded by patents may enable our commercial partners to
realize greater commercial value attributable to our traits, our right to
receive a portion of that increased commercial value is not dependent on the
existence of patent rights in a particular geography.

Our commercial strategy is to migrate forward in the ag-food supply chain from
the farmer and seed company to the consumer food company. Due to our early stage
focus on the development of abiotic stress traits, we have historically been
commercially aligned with farmers and seed companies. However, by also
establishing commercial relationships with consumer food companies and
developing consumer brand awareness of our high value premium ingredients, we
expect to be better positioned to garner a greater share of our product's value
proposition. Consumer food companies are looking to simplify their food
ingredient formulations and consumer are demanding "clean labeling" in their
foods, paying more for foods having fewer artificial ingredients and more
natural, recognizable and healthy ingredients. A 2017 survey by PR agency
Ingredient Communications found that 73 percent of consumers are happy to pay a
higher retail price for a food or drink product made with ingredients they
recognize. Because we increase nutrient density directly in the primary grains
and oils, we provide the mechanism for food formulation simplification
naturally, cost effectively and in a time-frame to meet evolving consumer
demands. Our branding strategy is to link consumer's health and nutrition
appreciation with the nutrients we source directly from the farm, enabling us to
share premium economics throughout the ag-food supply chain.

This forward migration in the ag-food supply chain will require that we build
additional organizational capabilities and industry expertise. For instance, we
are expanding our in-house commercial grain production and logistics resources
for greater scale capacity to bring our products to market. We are also
developing product branding strategies to build customer brand recognition and
loyalty.

                                       18
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Since our inception, we have devoted substantially all our efforts to research
and development activities, including the discovery, development, and testing of
our traits and products in development incorporating our traits. To date, we
have not generated revenues from sales of our commercial products, other than
limited revenues from our SONOVA products. We do receive revenues from fees
associated with the licensing of our traits to commercial partners. Our
long-term business plan and growth strategy is based in part on our expectation
that revenues from products that incorporate our traits will comprise a
significant portion of our future revenues.

We have never been profitable and had an accumulated deficit of $186.7 million
as of June 30, 2019. We incurred net losses of $8.4 million and $17.3 million
for the six months ended June 30, 2019 and 2018, respectively. We expect to
incur substantial costs and expenses before we obtain any revenues from the sale
of seeds or ingredients incorporating our traits. As a result, our losses in
future periods could become even more significant, and we may need additional
funding to support our operating activities.

Arcadia Specialty GenomicsTM




In February 2019, we established ASG a new strategic business unit dedicated to
developing and commercializing genetic improvements targeting plant content,
quality, climate resiliency and overall yield in hemp, a new crop for the
company. ASG conducts its business in only federal and state markets in which
its activities are legal.



The recent passage of the U.S. Agriculture Improvement Act of 2018 - also known
as the Farm Bill - confirmed the federal legalization of hemp, the term given to
non-psychoactive hemp containing less than 0.3% tetrahydrocannabinol (THC). It
also included provisions for legalizing on a federal level hemp's cultivation,
transport and sale for the first time in more than 75 years. Hemp, previously
considered a Schedule 1 drug and banned as an agricultural crop, lacks
substantive plant biology research and suffers from suboptimal genetics, highly
fragmented germplasm and rampant inconsistencies. As with our wheat and soybean
products, we plan to create hemp-based solutions that allow farmers to be more
productive and enable consumer packaged goods companies to differentiate their
brands in the marketplace. In the near term, our focus will be on acquiring
federal and state licensure in key geographies to launch our research and pilot
programs, for which began operations in early 2019.



In August 2019, we formed a new joint venture to serve the Hawaiian and Asian
markets, Archipelago Ventures™ Hawaii, LLC ("Archipelago"). This new venture
between ASG and Legacy Ventures Hawaii ("Legacy") combines ASG's extensive
genetic expertise and seed innovation history with Legacy's growth capital and
strategic advisory in the Hawaiian markets. Additionally, Legacy brings to the
partnership years of proven success in extraction, product formulation and sales
of cannabinol oil and distillate products through its equity partner, Vapen CBD.
Legacy was originally formed to be a vehicle for its partners to pursue hemp via
CBD opportunities within the Hawaiian islands. Legacy's primary objective is to
build world class cGMP extraction facilities to allow Hawaiian farmers an outlet
for maximizing their profits growing hemp and converting to high grade CBD, as
well as other high-value compounds. Legacy's equity partner, Vapen CBD, is a
wholly owned subsidiary of VapenTM MJ Ventures which is a publicly traded
cannabis operator based in Phoenix, Arizona listed on both the Canadian and
Frankfurt exchanges. Vapen CBD is focused exclusively on the processing of
high-quality, non-THC cannabinoid like CBD. Vapen CBD will be responsible for
the construction and operation of our Hawaiian hemp extraction facilities. This
joint venture creates a vertically integrated supply chain, from seed to sale,
we believe the first of its kind in Hawaii. ASG selected the best partners and
capabilities required to achieve three critically important strategic
imperatives: (1) ensure a reliable supply chain during critical scale up of the
global hemp market, a major risk mitigation for success, (2) ensure high quality
throughout the supply chain, from genetics to the field and field to the
customer and (3) ensure being well-positioned to address the unique needs and
opportunities of the Hawaiian market. Archipelago has committed to an aggressive
commercialization schedule, expanding hemp production acres in compliance with
Hawaii'sDepartment of Agriculture industrial hemp pilot program pursuant to the
2014 Farm bill and to be transitioned to the 2018 Farm bill when implemented
over the next 12 - 18 months. The Hemp Business Journal estimates the hemp CBD
market - the primary non-psychoactive compound in hemp - totaled $190 million in
2018. By 2022, the Brightfield Group, a hemp and CBD market research firm,
projects sales to reach $22 billion.



The ASG research and development activities are rapidly progressing in both our
Hawaii Industrial Hemp Pilot Program with the first hemp harvest in Molokai, as
well as breeding advances with our research activities in California. ASG
recently harvested its first hemp crop in Hawaii with positive results, having
achieved a milestone towards the commercial production of hemp flower for CBD
extraction. The ASG research & development facility located in Molokai has
demonstrated the capability to successfully grow and harvest multiple hemp
varieties for eventual flower and CBD production. This milestone represents the
first successful hemp harvest on Molokai and one of the first in all of Hawaii,
which positions ASG as a leader in developing this industry in Hawaii.
Furthermore, this milestone assures the next phase of ASG's growth in the
Hawaiian market by establishing varieties that can deliver commercial grade
performance without exceeding the 0.3% THC threshold that defines legal
industrial hemp. ASG is entering the next phase of growth in Hawaii which
includes rapid ramp-up of hemp flower production acreage and the establishment
of processing and extraction facilities through Archipelago in accordance with
forthcoming regulations.



                                       19
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The ASG hemp breeding program has achieved multiple milestones which lay the
foundation for our expansion of hemp breeding research activities in the U.S.
The indoor growth facilities are operational in Davis, establishing breeding
procedures that can be replicated in each of our research locations. The
internal platform to analyze cannabinoid and terpene profiles are operational,
enabling our breeding program to select lines with altered potency and/or
composition. The ASG analytical laboratory added critical CO2 extraction
capabilities enabling rapid evaluation of lines and allowing for new
innovations. In July 2019, the breeding team achieved a major milestone with the
creation of the first ASG proprietary variety developed in-house. This is an
important milestone evidencing ASG's proven technological competencies in plant
transformation realized in hemp and sets the stage for expansion of our breeding
operations, acceleration of varietal development and genetic optimization. As
was the intention from the onset, ASG has adopted an aggressive germplasm
acquisition strategy that has resulted in the development of a germplasm library
containing improved genetic variation sufficient to fuel a robust breeding
pipeline.



In addition to progress in the laboratory and in the field, ASG continues to
evaluate other potential sources of near-term hemp revenue opportunities,
including meeting with a number of U.S. growers looking to begin or ramp up
their hemp operations. As such, ASG has implemented seed production operations
targeting select varieties for specific regions and expects to begin serving
that market possibly as soon as the spring of 2020.

Components of Our Statements of Operations Data

Revenues


We derive our revenues from product revenues, licensing agreements, contract
research agreements, and government grants. Given our acute focus on the
near-term commercialization of our nutritional ingredient traits and products,
we do not intend to continue pursuing contract research agreements and
government grant projects at the levels we have historically. Over the next six
months, we expect these revenues to decline as our current contract research
agreements and government grant projects conclude and are not replaced.
Concurrently, as we introduce our new nutritional ingredient traits and products
to the market, we expect revenues to increase from such activities. Furthermore,
with the implementation of ASC Topic 606, future license revenues will no longer
include the amortization of deferred up-front license fees from existing license
agreements.

Product Revenues

Our product revenues to date have consisted solely of sales of our SONOVA
products. We generally recognize revenue from product sales upon sale to our
third-party distributors or customers. Our revenues fluctuate depending on the
timing of orders from our customers and distributors.

License Revenues


Our license revenues to date consist of up-front, nonrefundable license fees,
annual license fees, and subsequent milestone payments that we receive under our
research and license agreements. We have historically recognized nonrefundable
up-front license fees and guaranteed, time-based payments as revenue
proportionally over the expected development period. With the implementation of
ASC Topic 606, revenue generated from up-front license fees will be recognized
upon execution of the agreement. We recognize annual license fees when it is
probable that a material reversal will not occur.

Milestone fees are variable consideration that is initially constrained and
recognized only when it is probable that such amounts would not be reversed. The
Company assesses when achievement of milestones are probable in order to
determine the timing of revenue recognition for milestone fees. Milestones
typically consist of significant stages of development for our traits in a
potential commercial product, such as achievement of specific technological
targets, completion of field trials, filing with regulatory agencies, completion
of the regulatory process, and commercial launch of a product containing our
traits. Given the seasonality of agriculture and time required to progress from
one milestone to the next, achievement of milestones is inherently uneven, and
our license revenues are likely to fluctuate significantly from period to
period.

Contract Research and Government Grant Revenues


Contract research and government grant revenues consist of amounts earned from
performing contracted research primarily related to breeding programs or the
genetic engineering of plants for third parties. Contract research revenue will
continue to be accounted for as a single performance obligation for which
revenues are recognized over time using the input method (e.g. costs incurred to
date relative to the total estimated costs at completion). In addition, we are
entitled to receive a portion of the revenues generated from sales of products
that incorporate our seed traits. Products expected to result from such contract
research are in various stages of the product development cycle and we expect to
generate revenues from the sale of any such products in as soon as the next two
to four years.

                                       20
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We receive payments from government entities in the form of government grants.
Government grant revenue will continue to be accounted for as a single
performance obligation for which revenues are recognized over time using the
input method (e.g. costs incurred to date relative to the total estimated costs
at completion). Our obligation with respect to these agreements is to perform
the research on a best-efforts basis. Given the nature and uncertain timing of
receipt of government grants and timing of eligible research and development
expenses, such revenues are likely to fluctuate significantly from period to
period.

Operating Expenses

Cost of Product Revenues

Cost of product revenues relates to the sale of our SONOVA products and consists
of in-licensing and royalty fees, any adjustments or write-downs to inventory,
as well as the cost of raw materials, including inventory and third-party
services costs related to procuring, processing, formulating, packaging, and
shipping our SONOVA products.

Research and Development Expenses


Research and development expenses consist of costs incurred in the discovery,
development, and testing of our products and products in development
incorporating our traits. These expenses consist primarily of employee salaries
and benefits, fees paid to subcontracted research providers, fees associated
with in-licensing technology, land leased for field trials, chemicals and
supplies, and other external expenses. These costs are expensed as incurred.
Additionally, we are required from time to time to make certain milestone
payments in connection with the development of technologies in-licensed from
third parties. We expense these milestone payments at the time the milestone is
achieved and deemed payable. Our research and development expenses may fluctuate
from period to period as a result of the timing of various research and
development projects.

Selling, General, and Administrative Expenses


Selling, general, and administrative expenses consist primarily of employee
costs, professional service fees, and overhead costs. Our selling, general, and
administrative expenses may fluctuate from period to period. In connection with
our commercialization activities for our consumer ingredient products, we expect
to increase our investments in sales and marketing and business development.

Other Income, Net

Other income, net, consists of interest income and the amortization of investment premium and discount on our cash and cash equivalents and investments.

Initial Loss on Common Stock Warrant and Common Stock Adjustment Feature Liabilities

Initial loss on common stock warrant and common stock adjustment feature liabilities is comprised of the loss associated with the initial recognition of the common stock warrant and common stock adjustment feature liabilities associated with the March 2018 Private Placement at their respective fair values.

Change in the Estimated Fair Value of Common Stock Warrant and Common Stock Adjustment Feature Liabilities

Change in the estimated fair value of common stock warrant liabilities and common stock adjustment feature liability is comprised of the fair value remeasurement of the liabilities associated with the March 2018 Private Placement and the June 2018 and June 2019 Offerings.

Offering Costs


Offering costs consists of the costs incurred with the issuance of Common Stock
and the March 2018 Warrants in connection with the March 2018 Private Placement.
Also included are costs incurred with the June 2018 and 2019 Offerings and
Private Placements that have been allocated to the common stock warrant
liability. Costs include placement agent, legal, advisory, accounting and filing
fees.

Income Tax Benefit (Provision)


Our income tax provision has not been historically significant, as we have
incurred losses since our inception. The provision for income taxes consists of
state and foreign income taxes. Due to cumulative losses, we maintain a
valuation allowance against our U.S. deferred tax assets as of June 30, 2019 and
2018. We consider all available evidence, both positive and negative, including
but not limited to, earnings history, projected future outcomes, industry and
market trends and the nature of each of the deferred tax assets in assessing the
extent to which a valuation allowance should be applied against our U.S.
deferred tax assets.



                                       21
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Results of Operations

Comparison of the Three Months Ended June 30, 2019 and 2018




                                               Three Months Ended June 30,          $ Change       % Change
                                                2019                 2018
                                                           (In thousands except percentage)
Revenues:
Product                                    $          162       $          188     $      (26 )          (14 )%
License                                                 -                   90            (90 )         (100 )%
Contract research and government grants                41                  158           (117 )          (74 )%
Total revenues                                        203                  436           (233 )          (53 )%
Operating expenses:
Cost of product revenues                               89                  271           (182 )          (67 )%
Research and development                            1,950                1,794            156              9 %
Selling, general and administrative                 3,145                2,949            196              7 %
Total operating expenses                            5,184                5,014            170              3 %
Loss from operations                               (4,981 )             (4,578 )         (403 )            9 %
Other income, net                                     101                   94              7              7 %
Change in fair value of common stock
warrant liabilities and
  common stock adjustment feature
liability                                           9,482                 (535 )       10,017           1872 %
Offering costs                                       (365 )             (1,639 )        1,274            (78 )%
Net income (loss) before income taxes               4,237               (6,658 )       10,895            164 %
Income tax benefit (provision)                          1                  (11 )           12            109 %
Net income (loss)                          $        4,238$       (6,669 )$   10,907            164 %




Revenues

Product revenues accounted for 80% and 43% of our total revenues in the three
months ended June 30, 2019 and 2018, respectively. Our product revenues from
sales of our SONOVA products decreased by $26,000, or 14%, three months ended
June 30, 2019 compared to the same period in 2018, due to the timing of orders.

License revenues accounted for 0% and 21% of our total revenues in the three
months ended June 30, 2019 and 2018, respectively. A milestone was achieved
during the second quarter of the prior year that was not achieved in the second
quarter of 2019. Additionally, there were no license agreements executed in 2018
and 2019.

Contract research and government grant revenues accounted for 20% and 36% of our
total revenues for the three months ended June 30, 2019 and 2018, respectively.
Our contract research and government grant revenues decreased by $117,000, or
74%, in the three months ended June 30, 2019 compared to the same period in
2018. The decrease was primarily driven by the completion of agreements and
grants during 2018, as well as less activity for existing grants. Given our
acute focus on the near-term commercialization of our nutritional ingredient
traits and products, we do not intend to continue pursuing contract research
agreements and government grant projects at the levels we have historically. We
expect these revenues to continue to decline as our current contract research
agreements and government grant projects conclude and are not replaced.

Cost of Product Revenues

Cost of product revenues decreased by $182,000, or 67%, in the three months ended June 30, 2019 compared to the three months ended June 30, 2018. This was due to a write down of GLA inventory recorded in the second quarter of 2018.

Research and Development


Research and development expenses increased by $156,000, or 9%, in the three
months ended June 30, 2019 compared to the three months ended June 30, 2018. The
increase was primarily driven by higher employee-related expenses and additional
ASG costs as new activities ramp up.

                                       22

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Selling, General, and Administrative


Selling, general, and administrative (SG&A) expenses increased by $196,000, or
7%, in the three months ended June 30, 2019 compared to the three months ended
June 30, 2018. The increase was primarily driven by higher marketing and public
relations activity, as well as increased employee and recruiting expenses due to
the growth of the commercial development and legal teams. These increases were
partially offset by lower intellectual property legal fees.



Other Income, Net

Other income, net, of $101,000 for the three months ended June 30, 2019 was consistent with $94,000 recognized for the three months ended June 30, 2018.

Change in the Estimated Fair Value of Common Stock Warrant Liabilities and Common Stock Adjustment Feature Liability


Change in the estimated fair value of $9.5 million for the three months ended
June 30, 2019 includes the fair value remeasurement of the warrants issued with
the March 2018 Purchase Agreement, the June 2018 Offering, and the June 2019
Offering. The estimated fair value of the March 2018 Warrants decreased by $4.1
million, the estimated fair value of the June 2018 Offering Warrants decreased
by $4.6 million, and the estimated fair value of the June 2019 Offering Warrants
decreased by $0.8 million, all three driven by the decrease in the Company's
stock price.

Change in the estimated fair value of $535,000 for the three months ended June
30, 2018 includes the March 2018 Purchase Agreement's common stock adjustment
feature liability's final fair value remeasurement on May 7, 2018 and common
stock warrant liability fair value remeasurement on June 30, 2018, combined with
the June 2018 Offering common stock warrants estimated fair value remeasurement
on June 30, 2018. See Note 8.

Offering Costs


There were $365,000 of offering costs in the three months ended June 30, 2019,
comprised of the placement agent fees, placement agent warrants, advisory fees,
and legal and accounting fees related to the June 2019 Offering. See Note 8.
Offering costs for the three months ended June 30, 2018 of $1.6 million was
comprised of $929,000 associated with the March 2018 Private Placement and
$709,000 related to the June 2018 Offering.

Income Tax Benefit (Provision)

Income tax benefit for the three months ended June 30, 2019 was $1,000 as compared to the $11,000 recorded for three months ended June 30, 2018. The Company recognized net income during the three months ended June 30, 2019 versus net loss during the three months ended June 30, 2018.

                                       23

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Results of Operations

Comparison of the Six Months Ended June 30, 2019 and 2018



                                               Six Months Ended June 30,          $ Change       % Change
                                               2019                2018
                                                          (In thousands except percentage)
Revenues:
Product                                    $        269       $          249     $       20              8 %
License                                               -                   90            (90 )         (100 )%
Contract research and government grants              92                  311           (219 )          (70 )%
Total revenues                                      361                  650           (289 )          (44 )%
Operating expenses:
Cost of product revenues                            148                  307           (159 )          (52 )%
Research and development                          3,456                3,190            266              8 %
Selling, general and administrative               5,957                5,570            387              7 %
Total operating expenses                          9,561                9,067            494              5 %
Loss from operations                             (9,200 )             (8,417 )         (783 )            9 %
Other income, net                                   221                  132             89             67 %
Initial loss on common stock warrant and
common stock
  adjustment feature liabilities                      -               (4,000 )        4,000           (100 )%
Change in fair value of common stock
warrant liabilities and
  common stock adjustment feature
liability                                           987               (2,435 )        3,422            141 %
Offering costs                                     (365 )             (2,543 )        2,178            (86 )%
Net loss before income taxes                     (8,357 )            (17,263 )        8,906            (52 )%
Income tax provision                                (18 )                (21 )            3            (14 )%
Net loss                                   $     (8,375 )$      (17,284 )$    8,909            (52 )%




Revenues

Product revenues accounted for 75% and 38% of our total revenues in the six
months ended June 30, 2019 and 2018, respectively. Our product revenues from
sales of our SONOVA products increased by $20,000, or 8%, in the six months
ended June 30, 2019 compared to the same period in 2018, due to the timing of
orders.

License revenues accounted for 0% and 14% of our total revenues in the six months ended June 30, 2019 and 2018, respectively. There were no agreements executed in 2018 and 2019, and a milestone was determined to be probable of achievement by a licensee and the applicable fee of $90,000 was recognized in the second quarter of 2018.


Contract research and government grant revenues accounted for 25% and 48% of our
total revenues for the six months ended June 30, 2019 and 2018, respectively.
Our contract research and government grant revenues decreased by $219,000, or
70%, in the six months ended June 30, 2019 compared to the same period in
2018. The decrease was primarily driven by the completion of agreements and
grants during 2018, as well as less activity for existing grants. Given our
acute focus on the near-term commercialization of our nutritional ingredient
traits and products, we do not intend to continue pursuing contract research
agreements and government grant projects at the levels we have historically. We
expect these revenues to continue to decline as our current contract research
agreements and government grant projects conclude and are not replaced.

Cost of Product Revenues


Cost of product revenues decreased by $159,000, or 52%, in the six months ended
June 30, 2019 compared to the six months ended June 30, 2018. This was due to a
write-down in the second quarter of 2018 that was not present in 2019.

Research and Development


Research and development expenses increased by $266,000, or 8%, in the six
months ended June 30, 2019 compared to the six months ended June 30, 2018. The
increase was primarily driven by the timing of Verdeca studies and activities
and higher employee-related expenses due to the expansion of the commercial
agricultural operations and ASG teams, as well as external ASG costs. The
increase was partially offset by the reduction in GoodWheatTM field research
costs as current activities are inventoried in support of commercial sales.

                                       24

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Selling, General, and Administrative


Selling, general, and administrative (SG&A) expenses increased by $387,000, or
7%, in the six months ended June 30, 2019 compared to the six months ended June
30, 2018. The increase was driven by higher employee expenses relating primarily
to the growth of the commercial development and legal teams, as well as
increased consulting, marketing and public relations activity. These increases
were partially offset by lower intellectual property legal fees.



Other Income, Net


Other income, net, of $221,000 for the six months ended June 30, 2019 was an
increase of $89,000, or 67%, in income when compared to other income for the six
months ended June 30, 2018. The increase was primarily related to the higher
investment balance in 2019.

Initial Loss on Common Stock Warrant and Common Stock Adjustment Feature Liabilities


Initial loss on common stock warrant and common stock adjustment feature
liabilities of $4.0 million is comprised of the non-cash loss associated with
the initial recognition of the March 2018 Warrants and Common Stock adjustment
feature liabilities associated with the March 2018 Private Placement at
estimated fair values of $10.2 million and $3.8 million, respectively. The
combined fair value of $14 million less $10 million of proceeds yields the $4.0
million initial loss. There was no such loss in the second quarter of 2019.

Change in the Estimated Fair Value of Common Stock Warrant Liabilities and Common Stock Adjustment Feature Liability


Change in the estimated fair value of $987,000 million for the six months ended
June 30, 2019 includes the fair value remeasurement of the March 2018 Warrants
issued with the March 2018 Purchase Agreement and the June 2018 and June 2019
Offerings. The estimated fair value of the March 2018 Warrants decreased by
$135,000, the estimated fair value of the June 2018 Offering Warrants decreased
by $84,000, and the estimated fair value of the June 2019 Offering Warrants
decreased by $768,000, all three driven by the decrease in the Company's stock
price.

Change in the estimated fair value of common stock warrant liabilities and
common stock adjustment feature liability of $2.4 million for the six months
ended June 30, 2018 resulted from the fair value remeasurements of the March
2018 Purchase Agreement liabilities at March 31, 2018 and the final
remeasurement of the common stock adjustment feature on May 7, 2018, combined
with remeasurement of the June 2018 Offering liability and the March 2018
Purchase Agreement common stock warrant liability on June 30, 2018. The
estimated fair value of the March 2018 Purchase Agreement common stock
adjustment feature increased by $4.6 million, the estimated fair value of the
March 2018 Purchase Agreement common stock warrants decreased by $2.2 million,
and the estimated fair value of the June 2018 Offering common stock warrants
increased by $42,000. The March 2018 Purchase Agreement common stock adjustment
feature liability was released to equity following the final fair value
remeasurement. See Note 8.

Offering Costs


There was $365,000 offering costs in the six months ended June 30, 2019 is
comprised of the placement agent fees, placement agent warrants, advisory fees,
and legal and accounting fees related to the June 2019 Offering. See Note 8.
Offering costs for the six months ended June 30, 2018 of $2.5 million was
comprised of $1.8 million associated with the March 2018 Private Placement and
$709,000 related to the June 2018 Offering.

Income Tax Provision

Income tax provision of $18,000 for the six months ended June 30, 2019 was consistent with the $21,000 recorded for six months ended June 30, 2018.

Seasonality


We and our commercial partners operate in different geographies around the world
and conduct field trials used for data generation, which must be conducted
during the appropriate growing seasons for particular crops and markets. Often,
there is only one crop-growing season per year for certain crops and markets.
Similarly, climate conditions and other factors that may influence the sales of
our products may vary from season to season and year to year. In particular,
weather conditions, including natural disasters such as heavy rains, hurricanes,
hail, floods, tornadoes, freezing conditions, drought, or fire, may affect the
timing and outcome of field trials, which may delay milestone payments and the
commercialization of products incorporating our seed traits. In the future,
sales of commercial products that incorporate our seed traits will vary based on
crop growing seasons and weather patterns within particular regions.

The level of seasonality in our business overall is difficult to evaluate at
this time due to our relatively early stage of development, our relatively
limited number of commercialized products, our expansion into new geographical
markets, and our introduction of new products and traits.

                                       25

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Liquidity, Capital Resources, and Going Concern


We have funded our operations primarily with the net proceeds from our initial
public offering and private placements of equity and debt securities. Our
principal use of cash is to fund our operations, which are primarily focused on
completing development and commercializing our product quality seed traits. This
includes replicating field trials, coordinating with our partners on their
development programs, and scaling harvest production of wheat, hemp, and soy. As
of June 30, 2019, we had cash and cash equivalents of $14.6 million and
short-term investments of $5.4 million. For the six months ended June 30, 2019
and the twelve months ended December 31, 2018, the Company had net losses of
$8.4 and $13.5 million, and net cash used in operations of $8.4 million and
$13.6 million, respectively. The majority of the income in the second quarter of
2019 was due to the $9.5 million of non-cash warrant income resulting from the
quarterly remeasurement of the common stock warrant liabilities.

As is disclosed in Note 8, the Company has obtained funding through two
offerings during the first half of 2018 and one offering during June 2019. On
March 19, 2018, the Company entered into securities purchase agreements with
institutional investors in connection with a private placement of common stock
and warrants in the amount of $10 million, exclusive of any related transaction
fees. On June 11, 2018, the Company entered into agreements with institutional
investors through a registered direct offering in the amount of $14 million,
exclusive of any related transaction fees. On June 12, 2019, the Company entered
into agreements with institutional investors through a registered direct
offering in the amount of $7.5 million exclusive of any related transaction
fees.

We believe that our existing cash, cash equivalents, and short-term investments
will not be sufficient to meet our anticipated cash requirements for at least
the next 12 months which raises substantial doubt about the Company's ability to
continue as a going concern. See Note 1 of the notes to our consolidated
financial statements for more information.

We may seek to raise additional funds through debt or equity financings, if
necessary. We may also consider entering into additional partner arrangements.
Our sale of additional equity would result in dilution to our stockholders. Our
incurrence of debt would result in debt service obligations, and the instruments
governing our debt could provide for additional operating and financing
covenants that would restrict our operations. If we do require additional funds
and are not able to secure adequate additional funding, we may be forced to
reduce our spending, extend payment terms with our suppliers, liquidate assets,
or suspend or curtail planned development programs. Any of these actions could
materially harm our business, results of operations and financial condition.

Cash Flows


The following table summarizes our cash flows for the periods indicated (in
thousands):



                                               Six Months Ended June 30,
                                               2019                2018
         Net cash (used in) provided by:
         Operating activities              $     (8,429 )$       (6,918 )
         Investing activities                     4,212              (15,067 )
         Financing activities                     6,865               22,527
         Net increase in cash              $      2,648       $          542



Cash used in operating activities


Cash used in operating activities for the six months ended June 30, 2019 was
$8.4 million. Our net loss of $8.4 million, non-cash income for the change in
fair value of common stock warrant liabilities and common stock adjustment
feature liability of $987,000, operating lease payments of $349,000,
amortization of investment premium of $82,000 and adjustments in our working
capital accounts of $237,000 were partially offset by $811,000 of stock-based
compensation, $348,000 of lease amortization and $77,000 of depreciation and
amortization, as well as $365,000 of offering costs that are also included in
financing activities.

Cash used in operating activities for the six months ended June 30, 2018 was
$6.9 million. Our net loss of $17.3 million, net amortization of investment
premium and discount of $27,000, and gain on the disposal of equipment of $3,000
were partially offset by non-cash charges of $4.0 million for the initial loss
on and $2.4 million for the change in fair value of common stock warrant
liabilities and common stock adjustment feature liability, $656,000 for
stock-based compensation, and depreciation and amortization of $98,000, as well
as $2.5 million for offering costs also included in financing activities and
adjustments in our working capital accounts of $664,000.

                                       26

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Cash provided by (used in) investing activities


Cash provided by investing activities for the six months ended June 30, 2019
consisted of $8.6 million in purchases of short-term investments and $315,000 in
purchases of property and equipment, which were offset by $13.2 million in
proceeds from sales and maturities of investments.

Cash used in investing activities for the six months ended June 30, 2018 consisted of $18.9 million in purchases of short-term investments and $68,000 in purchases of property and equipment, which was offset by $3.9 million in proceeds from sales and maturities of investments.

Cash provided by financing activities


Cash provided by financing activities for the six months ended June 30, 2019
consisted of proceeds from the issuance of stock and warrants relating to the
June 2019 Offering of $7.5 million and proceeds from the purchase of ESPP shares
of $8,000, partially offset by payments of offering costs totaling $643,000.

Cash provided by financing activities for the six months ended June 30, 2018
consisted of proceeds from the issuance of stock and warrants relating to the
March 2018 Private Placement of $10.0 million and the June 2018 Offering of
$14.0 million, partially offset by $2.4 million of offering costs for both
transactions paid during the period. Proceeds from the exercise of stock options
and the purchase of ESPP shares totaled $966,000.

Off-Balance Sheet Arrangements


Since our inception, we have not engaged in any off-balance sheet arrangements,
including the use of structured finance, special purpose entities, or variable
interest entities other than Verdeca, which is discussed in the notes to our
condensed consolidated financial statements.

Critical Accounting Policies and Estimates


Our management's discussion and analysis of our financial condition and results
of operations is based on our financial statements, which have been prepared in
accordance with GAAP. The preparation of these financial statements requires us
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as the reported revenue generated, and
expenses incurred during the reporting periods. Our estimates are based on our
historical experience and on various other factors that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

We consider our critical accounting policies and estimates to be revenue
recognition, inventories, income taxes, the liabilities relating to the March
2018 Purchase Agreement, the June 2018 Offering, the June 2019 Offering, and
stock-based compensation. See Notes 4 and 8 for the estimates made in connection
with the securities purchase agreements executed during the first six months of
2018 and 2019.

© Edgar Online, source Glimpses

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