ARCADIA BIOSCIENCES, INC. 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 audited 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. 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.
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Overview
We are a leader in science-based approaches to developing high value crop productivity traits primarily in hemp, wheat, and soybean, designed to enhance farm economics by improving the performance of crops in the field, as well as their value as food ingredients, health and wellness products, and their viability for industrial applications. We use state of the art gene-editing technology and advanced breeding techniques to develop these proprietary innovations which we are beginning to monetize through a number of methods including seed and grain sales, product extract sales, trait licensing and royalty agreements.
Our commercial strategy is to link consumer's nutrition, health and wellness
demands with the superior functional benefits our crops deliver directly from
the farm, enabling us to share premium economics throughout the ag-food supply
chain and to build a world-class estate of high value traits and varieties. In
particular, we believe the recent legalization of hemp in the
The passage of the
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Table of Contents
On
Arcadia GoodHemp
In
In
Archipelago creates a vertically integrated supply chain, from seed to sale, we
believe the first of its kind in
Arcadia GoodWheat
In 2018, we launched our GoodWheat brand, a non-genetically modified (non-
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-
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With additional patents granted in 2019, we now hold more than 15 global patents on our high fiber Resistant Starch wheat, protecting both bread wheat and durum (pasta) wheat. Claims granted in 2019 strengthen our intellectual property for our Resistant Starch portfolio of products.
We announced in
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.
Verdeca HB4® Soybean
In 2012, we partnered with
HB4® was discovered by researchers of the CONICET, the
Verdeca's HB4® soybeans have undergone extensive testing, including
multi-location field trials in
HB4® is the first trait offering tolerance to drought and salinity in soybeans,
with 30 international patents. HB4® is currently approved in the four main
countries producing this strategic crop - the
Soybeans are the world's fourth largest crop, grown on more than 120 million
hectares annually. Global population growth, combined with a growing middle
class in countries like
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 commercial products, other than limited revenues from our GoodWheat and 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.
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We have never been profitable and had an accumulated deficit of
Impact of Novel Coronavirus
We are closely monitoring how the spread of the novel coronavirus is affecting
our employees and business operations. We have developed preparedness plans to
help protect the safety of our employees while safely continuing business
operations. Due to the spread of the outbreak in
At this time, there is significant uncertainty relating to the trajectory of the novel coronavirus outbreak and impact of related responses. The continued spread of the outbreak may further impact our business, results of operations, and financial condition. See "Risk Factors- Risks Related to Our Business and Our Other Industries-The novel coronavirus outbreak could adversely impact our business, financial condition and results of operations."
Components of Our Statements of Operations Data
Revenues
We derive our revenues from product revenues, licensing agreements, royalties, contract research agreements, and government grants. Given our acute focus on selling our GoodWheat and GoodHemp products, we do not intend to continue pursuing contract research agreements and government grant projects.
Product Revenues
Our product revenues to date have consisted primarily of sales of our SONOVA products, with initial GoodWheat seed sale revenues recognized in the fourth quarter of 2019. We recognize revenue from product sales when control of the product is transferred to third-party distributors and manufacturers, collectively "our customers," which generally occurs upon shipment. Our revenues fluctuate depending on the timing of shipments of product to our customers.
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.
Milestone fees are variable consideration that is initially constrained and recognized only when it is probable that such amounts would not be reversed. 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 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 is 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).
We have received payments from government entities in the form of government grants. Government grant revenue is 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.
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Table of Contents Operating Expenses Cost of Product Revenues
Cost of product revenues relates to the sale of our SONOVA and GoodWheat 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 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. Our research and development expenses may fluctuate from period to period.
Change in Fair Value of Contingent Consideration
Change in the fair value of contingent consideration is comprised of the gain associated with the reduction of our contingent liability as the result of a decision to abandon a program that was previously accrued. See Note 13.
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.
Interest Expense
Interest expense consists primarily of contractual interest on notes payable that were entered into in the third quarter of 2019 to finance the purchase of company vehicles.
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
Change in the Estimated Fair Value of Common Stock Warrant Liabilities and Common Stock Adjustment Feature Liability
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
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Table of Contents Offering Costs
Offering costs consists of the costs incurred with the issuance of Common Stock
and the
Income Tax 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
Results of Operations
Comparison of the Years ended
Year Ended
December 31,
2019 2018
(in thousands)
Revenues:
Product $ 814 $ 657
License 67 150
Contract research and government grants 288 657
Total revenues 1,169 1,464
Operating expenses (income):
Cost of product revenues 885 661
Research and development 7,098 6,069
Change in fair value of contingent consideration (1,000 ) -
Selling, general and administrative 13,567 11,604
Total operating expenses 20,550 18,334
Loss from operations (19,381 ) (16,870 )
Interest expense (5 ) -
Other income, net 466 394
Initial loss on common stock warrant and
common stock adjustment feature liabilities - (4,000 )
Change in fair value of common stock warrant
and common stock adjustment feature
liabilities (9,243 ) 9,561
Offering costs (708 ) (2,555 )
Loss before income taxes (28,871 ) (13,470 )
Income tax provision (2 ) (10 )
Net loss (28,873 ) (13,480 )
Net loss attributable to non-controlling interests (68 ) -
Net loss attributable to common stockholders $ (28,805 ) $ (13,480 )
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Table of Contents Revenues
Product revenues accounted for 70% and 45% of our total revenues for the years
ended
License revenues accounted for 6% and 10% of our total revenues for the years
ended
Contract research and government grant revenues accounted for 25% and 45% of our
total revenues for the years ended
Cost of Product Revenues
Cost of product revenues increased by
Research and Development
Research and development expenses increased by
Change in Fair Value of Contingent Consideration
Change in the fair value of contingent consideration is comprised of the gain of
Selling, General, and Administrative
Selling, general, and administrative expenses increased by
Interest Expense
Interest expense was
Other Income, Net
Other income, net, increased
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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
Change in the Estimated Fair Value of Common Stock Warrant Liabilities and Common Stock Adjustment Feature Liability
Change in the estimated fair value of common stock warrant liabilities and
common stock adjustment feature liability of
Change in the estimated fair value of common stock warrant liabilities and
common stock adjustment feature liability of
Offering Costs
Offering costs for the year ended
Income Tax Provision
The income tax provision decreased
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Table of Contents 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.
Liquidity, Capital Resources and Going Concern
We have funded our operations primarily with the net proceeds from our initial
public offering, private placements of equity securities and debt, as well as
proceeds from the sale of our SONOVA products and payments under license
agreements, contract research agreements and government grants. Our principal
use of cash is to fund our operations, which are primarily focused on completing
development and commercializing our 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
As is disclosed in Note 11, the Company obtained funding through two separate
arrangements during the first half of 2018 and two offerings during
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 the 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.
At this time, there is significant uncertainty relating to the trajectory of the novel coronavirus outbreak and impact of related responses. The continued spread of the outbreak could materially harm our business, results of operations, and financial condition. Due to this uncertainty and plans outside of management's control, we may not be able to achieve and implement such plans within one year after the date that the financial statements are issued to address the substantial doubt that exists.
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Cash Flows
The following table summarizes our cash flows for the periods indicated (in
thousands):
Year Ended
December 31,
2019 2018
Net cash (used in) provided by:
Operating activities $ (17,198 ) $ (13,631 )
Investing activities (8,369 ) (5,975 )
Financing activities 21,986 22,479
Net (decrease) increase in cash and cash equivalents $ (3,581 ) $ 2,873 Cash Flows from Operating Activities
Cash used in operating activities for the year ended
Cash used in operating activities for the year ended
Cash Flows from Investing Activities
Cash used in investing activities for the year ended
Cash used in investing activities for the year ended
Cash Flows from Financing Activities
Cash provided by financing activities for the year ended
Cash provided by financing activities for the year ended
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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 the consolidated financial statements.
Critical Accounting Polices 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, determination of the provision for income taxes, stock-based
compensation, fair value of certain equity instruments, and net realizable value
of inventory. See Notes 5 and 11 for the estimates made in connection with the
securities purchase agreements executed during the years ended
Revenue Recognition
We recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. See Note 2 for further detail.
We generally recognize product revenues once passage of title has occurred, which is generally upon shipment. Shipping and handling costs charged to customers are recorded as revenues and included in cost of product revenues at the time the sale is recognized.
We have determined that, at the inception of each license agreement, there is only one deliverable for the license for, access to and assistance with the development of the specified intellectual property. We recognize revenue up-front and annual license fees in full when it is deemed probable to be earned. See Note 2 for further detail.
We recognize revenue related to milestone payments when it is probable that such amounts would not be reversed. See Note 2 for further detail.
Up-front license fees for newly executed agreements are recognized upon execution. Annual license fees and milestone fees are variable consideration that is initially constrained and recognized only when it is probable that such amounts would not be reversed. The evaluation and analysis of such fees is performed and once the annual license or milestone fee is deemed probable to have been earned, it is recognized in full in that period. See Note 2 for further detail.
Contract research revenue consists of amounts earned from performing contracted research activities for third parties. Activities performed are related to breeding programs or the genetic engineering of plants and are subject to an executed agreement. We generally recognize fees for research activities ratably over the contractually specified performance period.
Grant revenues are recognized as eligible research and development expenses are incurred using a proportional performance recognition methodology.
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Table of Contents Inventories
Inventory costs are tracked on a lot-identified basis, valued at the lower of cost or net realizable value and are included as cost of product revenues when sold. We compare the cost of inventories with market value and write down inventories to net realizable value, if lower. We write down inventory when conditions indicate that the net realizable value may be less than cost due to physical deterioration, obsolescence, changes in price levels or other factors. Additionally, we provide reserves for excess and slow-moving inventory to its estimated net realizable value. The inventory write-downs are based upon estimates about future demand from our customers and distributors and market conditions. Future events that could significantly influence our judgment and related estimates include conditions in target markets, introduction of new products or changes to current or future competitor products.
Stock-Based Compensation
We recognize compensation expense related to the employee stock purchase plan and stock options based on the estimated fair value of the awards on the date of grant, net of estimated forfeitures. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards.
We recorded stock-based compensation expense related to equity awards of
In determining the fair value of stock-based awards, we use the Black-Scholes option-pricing model and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment to determine.
Expected Term-The expected term represents the period that stock-based awards
are expected to be outstanding and was estimated based on a simplified
method allowed by the
Expected Volatility-Since we were privately held and do not have sufficient trading history for our common stock, the expected volatility was estimated based on the average historical volatilities of common stock of comparable publicly traded entities over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on their similar size, stage in the life cycle, or area of specialty. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available.
Risk-Free Interest Rate-The risk-free interest rate is based on the
Expected Dividend-We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we used an expected dividend yield of zero.
For stock options and other equity awards, our board of directors determine the
fair value of each share of underlying common stock based on the closing price
of our common stock as reported on the
In addition to the Black-Scholes assumptions, we estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors. The impact from any forfeiture rate adjustment would be recognized in full in the period of adjustment and if the actual number of future forfeitures differs from our estimates, we might be required to record adjustments to stock-based compensation in future periods.
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Table of Contents Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Recent Accounting Pronouncements
For discussions of the adoption and potential impacts of recently issued accounting standards, refer to Note 3 - Recent Accounting Pronouncements and Note 14 - Leases to the accompanying consolidated financial statements.
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