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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-K)

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03/25/2020 | 04:24pm 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 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.

"Arcadia Biosciences," "Sonova," "Sonova GLA Safflower Oil and design," "GoodHemp" and "GoodWheat" are our registered trademarks in the United States and, in some cases, in certain other countries. This report may also contain trademarks, service marks, and trade names of other companies. 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 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 U.S. and many other areas of the world has created a significant agricultural and financial opportunity. The demonstrated broad demand for industrial, nutritional, health and wellness products from hemp, coupled with its poor genetics represent a vast, new opportunity for Arcadia to add substantial value to its existing high value trait and seed estate. We are applying our proprietary, rapid prototyping technology platform, ArcaTech, to deliver innovations addressing the many challenges farmers face in growing what is essentially an undomesticated crop. As such, our forward discovery research is focused on non-GM hemp innovations.

The 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 cannabis 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, not previously distinguished by the federal government from cannabis, 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. We are targeting hemp-based solutions that allow farmers to reliably and consistently achieve compliance with USDA regulations, through varieties with improved functionality and application of specific attributes such as select cannabinoid contents for health and wellness, enhanced proteins profiles for plant-based dietary applications and industrial applications such as clothing and hempcrete. Arcadia conducts its business in only federal and state markets in which its activities are legal.




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On October 31, 2019, the USDA published the interim final rule as authorized by the Agriculture Improvement Act of 2018 for hemp cultivation, which mandates that states test hemp crops and dispose of "hot" crops that exceed 0.3% THC. While hemp farmers will have access to crop protection options, the destruction of hot crops that fail these stringent inspections will not be a covered loss under crop insurance programs. In 2019 alone, more than 20% of U.S. hemp crops were non-compliant, representing over $2 billion in losses for growers.



Arcadia GoodHemp


In December 2019, we announced the launch of a new product line, GoodHemp, as the company's new commercial brand for delivering genetically superior hemp seeds, transplants, flower and extracts. The first variety in GoodHemp's catalog, Complia Bot+, is a widely adapted cannabis strain that delivers high cannabinoid (CBD) content (more than 10%) with ultra-low THC, the psychoactive compound in cannabis. It is part of the Complia hemp seed line Arcadia is bringing to market through GoodHemp, with six additional proprietary varieties in early adopter farmer trials with sales expected in the 2020 season.

The Hemp Business Journal estimates the hemp CBD market - the primary non-psychoactive compound in hemp - totaled $190 million in U.S. sales in 2018. By 2022, the Brightfield Group, a hemp and CBD market research firm, projects U.S. sales to reach $22 billion. Additionally, Grandview research estimates the market for non-cannabinoid, industrial hemp market will exceed $15 billion by 2027.

Archipelago Ventures Hawaii, LLC

In August 2019, we formed a new joint venture to serve the Hawaiian, North American and Asian hemp markets, Archipelago Ventures Hawaii, LLC ("Archipelago"). This new venture between Arcadia and Legacy Ventures Hawaii ("Legacy") combines Arcadia's extensive genetic expertise and seed innovation history with Legacy's growth capital and strategic advisory expertise 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 opportunities within the Hawaiian Islands. Legacy's primary role within Archipelago is to build world class cGMP extraction facilities to allow Hawaiian farmers an outlet for maximizing their profits growing and converting hemp to high grade CBD, as well as other high-value compounds. Legacy's equity partner, Vapen CBD, is a wholly owned subsidiary of VEXT which is a publicly traded cannabis operator based in Phoenix, Arizona listed on both the Canadian and Frankfurt exchanges.

Archipelago creates a vertically integrated supply chain, from seed to sale, we believe the first of its kind in Hawaii, and has three 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.

Arcadia GoodWheat

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. Consumer food companies are looking to simplify their food ingredient formulations and consumers 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% of consumers are happy to pay a higher retail price for a food or drink product made with ingredients they recognize. Because GoodWheat increases the nutrient density directly in the primary grains and oils, it provides the mechanism for food formulation simplification naturally, cost effectively and in a time-frame to meet evolving consumer demands.

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 2019, the U.S. Patent and Trademark Office granted us the latest patents 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.


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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 August 2019 an agreement with Bay State Milling Company and Arista Cereal Technologies to bring to market our resistant starch GoodWheat in North America and other key markets, beginning in late 2019. In the daily American diet approximately 500 calories come from wheat products, 25% of the FDA's recommended daily caloric intake for a woman and 20% for a man. The GoodWheat portfolio of specialty wheat varieties delivers new functional value through an ingredient already an important component of the human diet.

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 Bioceres, Inc. ("Bioceres") an Argentina-based technology company, to form Verdeca LLC, ("Verdeca") a U.S.-based joint venture company to deploy next-generation soybean traits developed to benefit soybean producers through quality improvement, stress mitigation and management practices. The HB4® soybean varieties deliver two layers of value for growers: drought and herbicide tolerance, offering resistance to a broad-spectrum herbicide utilized to prevent growth of a wide range of annual and perennial broadleaf weeds and grasses.

HB4® was discovered by researchers of the CONICET, the National Scientific and Research Council in Argentina, through the identification of one gene that gives sunflower the capacity to tolerate hydric and saline stress. This gene was transferred from sunflower to soybean.

Verdeca's HB4® soybeans have undergone extensive testing, including multi-location field trials in Argentina and the United States and multiple regulatory field trials. The results of these trials demonstrate that the HB4® trait can provide yield advantages under stress conditions - including drought and low-water conditions - found in several soybean production areas. Verdeca introduced a trait stack combining HB4® with an herbicide tolerance trait to deliver two layers of value for growers.

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 U.S., Brazil, Argentina and Paraguay - representing 80% of the global soybean market. Regulatory submissions are under consideration by China, Canada, Bolivia and Uruguay. Import approval by China is required for commercial launch and the expectation to obtain such approval in late 2020 is under review in light of the recent coronavirus.

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 China and India, have resulted in increased demand for this important protein source. More than 50 million of the world's soybean hectares are grown in Argentina and Brazil, a region that has experienced significant drought conditions in recent years.

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 $207.2 million as of December 31, 2019. We incurred net losses of $28.9 million and $13.5 million for the years ended December 31, 2019 and 2018, respectively. We expect to incur substantial costs and expenses before we obtain any revenues from the sale of seeds incorporating our traits. As a result, our losses in future periods could become even more significant, and we will need additional funding to support our operating activities.

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 California and elsewhere where we have corporate offices, we have temporarily restricted access to our offices until at least April 1, 2020 and implemented a mandatory remote work policy during this period.

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

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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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 March 2018 Private Placement at their respective fair values.

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 March 2018 Private Placement and the June 2018, June 2019, and September 2019 Offerings.


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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, June 2019, and September 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 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 December 31, 2019 and 2018. We consider all available evidence, both positive and negative, including but not limited to, cumulative losses, 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.

Results of Operations

Comparison of the Years ended December 31, 2019 and 2018



                                                                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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Revenues

Product revenues accounted for 70% and 45% of our total revenues for the years ended December 31, 2019 and 2018, respectively. The $157,000, or 24%, increase in product revenues from sales of our SONOVA products was primarily driven by additional volume of encapsulated orders.

License revenues accounted for 6% and 10% of our total revenues for the years ended December 31, 2019 and 2018, respectively. There were no license agreements executed in 2018 and 2019.

Contract research and government grant revenues accounted for 25% and 45% of our total revenues for the years ended December 31, 2019 and 2018, respectively. The $369,000, or 56%, decrease in contract research and government grant revenues was primarily driven by the completion of agreements and 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.

Cost of Product Revenues

Cost of product revenues increased by $224,000, or 34%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase is primarily due to increased product revenues and the write-down of wheat inventory.

Research and Development

Research and development expenses increased by $1.0 million, or 17%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase was primarily driven by additional soybean pre-commercial activities and higher employee-related expenses as we expand our research teams, as well as external hemp-related costs. The increase was partially offset by the reduction in GoodWheat field research costs as our commercial efforts progress, as well as reduced subcontracting expenses related to government grants.

Change in Fair Value of Contingent Consideration

Change in the fair value of contingent consideration is comprised of the gain of $1.0 million 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

Selling, general, and administrative expenses increased by $2.0 million, or 17%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase was primarily driven by higher consulting fees and consultants' stock compensation expense, stock compensation expense associated with modification of CEO stock options, higher employee-related expenses, and increased marketing and public relations activities. These increases were partially offset by lower intellectual property legal fees.

Interest Expense

Interest expense was $5,000 for the year ended December 31, 2019, due to new notes payable agreements entered into during 2019. See Note 10. There was no such expense for the year ended December 31, 2018.

Other Income, Net

Other income, net, increased $72,000, or 18%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. This was primarily related to the higher investment balance in 2019.


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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 $4.0 million for the year ended December 31, 2018 is comprised of the non-cash loss associated with the initial recognition of the common stock warrant and common stock adjustment feature liabilities associated with the Private Placement in March 2018 at estimated fair values of $10.2 million and $3.8 million, respectively. The combined fair value of $14.0 million less $10.0 million of proceeds yields the $4.0 million initial loss. There was no such loss during the year ended December 31, 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 common stock warrant liabilities and common stock adjustment feature liability of $9.2 million of expense for the year ended December 31, 2019 resulted from the fair value remeasurement of the March 2018 Warrants pursuant to the March 2018 Purchase Agreement, the June 2018 Offering, June 2019 Offering, and the September 2019 Offering. The estimated fair value of the March 2018 Warrants increased by $2.2 million and the estimated fair value of the June 2018 Offering Warrants increased by $2.7 million, driven largely by the increase in the Company's stock price from December 31, 2018 to December 31, 2019. The estimated fair value of the June 2019 Offering Warrants increased by $4.8 million, the result of the increase in the Company's stock price from their issuance date of June 14, 2019 to the August 31, 2019 and December 31, 2019 remeasurement dates, partially offset by the reduction in the number of warrants outstanding with the exercise of 1,053,745 warrants. The estimated fair value of the September 2019 Warrants decreased by $0.5 million due to the decrease in the Company's stock price from their issuance on September 10, 2019 to December 31, 2019.

Change in the estimated fair value of common stock warrant liabilities and common stock adjustment feature liability of $9.6 million of income for the year ended December 31, 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. Also included is the remeasurement of the June Offering liabilities and the Purchase Agreement common stock warrant liabilities through December 31, 2018. The estimated fair value of the Purchase Agreement common stock adjustment feature was $4.6 million, the estimated fair value of the Purchase Agreement common stock warrants decreased by $7.9 million, and the estimated fair value of the June Offering common stock warrants decreased by $6.3 million due to the decrease in the Company's stock price. The Purchase Agreement common stock adjustment feature liability was released to equity following the final fair value remeasurement in May 2018. See Note 11.

Offering Costs

Offering costs for the year ended December 31, 2019 of $0.7 million is comprised of the placement agent fees, placement agent warrants, advisory fees, and legal and accounting fees related to the June 2019 and September 2019 Offerings. Offering costs for the year ended December 31, 2018 of $2.6 million is comprised of $1.8 million associated with the March 2018 Private Placement and $721,000 related to the June 2018 Offering and the June 2018 Private Placement.

Income Tax Provision

The income tax provision decreased $8,000 or 80% for the year ended December 31, 2019 compared to the year ended December 31, 2018. See Note 15.


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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 December 31, 2019, we had cash and cash equivalents of $8.4 million and short-term investments of $16.9 million. For the years ended December 31, 2019 and 2018, the Company had net losses of $28.9 million and $13.5 million, respectively, and net cash used in operations of $17.2 million and $13.6 million, respectively.

As is disclosed in Note 11, the Company obtained funding through two separate arrangements during the first half of 2018 and two offerings during June 2019 and September 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. In August and September 2019, investors exercised warrants, generating cash proceeds totaling $5.3 million. On September 5, 2019, the Company entered into agreements with institutional investors through a registered direct offering in the amount of $10 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 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 December 31, 2019 was $17.2 million. Our net loss of $28.9 million, change in fair value of contingent consideration of $1.0 million, operating lease payments of $715,000, and net amortization of investment premium and discount of $180,000 were partially offset by the change in fair value of common stock warrant liabilities and common stock adjustment feature liability of $9.2 million, non-cash charges of $2.3 million for stock-based compensation, depreciation and amortization of $902,000, as well as $708,000 of offering costs incurred in connection with financing activities and adjustments in our working capital accounts of $0.1 million.

Cash used in operating activities for the year ended December 31, 2018 was $13.6 million. Our net loss of $13.5 million, the change in fair value of common stock warrant liabilities and common stock adjustment feature liability of $9.6 million and net amortization of investment premium and discount of $193,000 were partially offset by the initial loss on common stock warrant and adjustment feature liabilities of $4.0 million, non-cash charges of $1.6 million for stock-based compensation, and depreciation and amortization of $154,000, as well as $2.6 million of offering costs incurred in connection with financing activities and adjustments in our working capital accounts of $1.1 million.

Cash Flows from Investing Activities

Cash used in investing activities for the year ended December 31, 2019 of $8.4 million primarily consisted of $28.4 million in purchases of short-term investments and $1.5 million in purchases of property and equipment, partially offset by $21.5 million in proceeds from sales and maturities of investments.

Cash used in investing activities for the year ended December 31, 2018 of $6.0 million primarily consisted of $29.9 million in purchases of short-term investments and $250,000 in purchases of property and equipment, partially offset by $24.2 million in proceeds from sales and maturities of investments.

Cash Flows from Financing Activities

Cash provided by financing activities for the year ended December 31, 2019 of $21.9 million consisted of proceeds from the issuance of stock and warrants relating to the June 2019 Offering of $7.5 million and from the September 2019 Offering of $10.0 million, proceeds from the exercise of some of the June 2019 warrants of $5.3 million, capital contributions from the non-controlling interest in our joint venture of $689,000 and proceeds from the purchase of ESPP shares of $21,000. Partially offsetting these proceeds were payments of offering costs totaling $798,000 and $663,000 for the September 2019 and June 2019 Offerings, respectively, as well as $24,000 in payments of offering costs for the June 2018 Offering.

Cash provided by financing activities for the year ended December 31, 2018 of $22.5 million consisted of proceeds from the issuance of stock and warrants in March 2018 of $10.0 million and in June 2018 of $14.0 million, partially offset by $2.5 million of offering costs for both transactions paid during the period. Proceeds from the exercise of stock options and the purchase shares under the employee stock purchase plan totaled $969,000.


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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 December 31, 2019 and 2018.

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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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 $2.3 million and $1.6 million for the years ended December 31, 2019 and 2018, respectively.

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 SEC due to insufficient historical data, and defines the term as the average of the contractual term of the options and the weighted-average vesting period for all open employee awards.

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 U.S.Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option.

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 NASDAQ Stock Market on the date of grant.

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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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.

© Edgar Online, source Glimpses

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