0001564590-16-018994.txt : 20160510 0001564590-16-018994.hdr.sgml : 20160510 20160510171647 ACCESSION NUMBER: 0001564590-16-018994 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 62 CONFORMED PERIOD OF REPORT: 20160331 FILED AS OF DATE: 20160510 DATE AS OF CHANGE: 20160510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Arcadia Biosciences, Inc. CENTRAL INDEX KEY: 0001469443 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE CHEMICALS [2870] IRS NUMBER: 810571538 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-37383 FILM NUMBER: 161636873 BUSINESS ADDRESS: STREET 1: 202 COUSTEAU PLACE STREET 2: SUITE 200 CITY: DAVIS STATE: X1 ZIP: 95618 BUSINESS PHONE: 602-429-0476 MAIL ADDRESS: STREET 1: 4222 E. THOMAS RD STREET 2: SUITE 320 CITY: PHOENIX STATE: X1 ZIP: 85018 10-Q 1 rkda-10q_20160331.htm 10-Q rkda-10q_20160331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 001-37383

 

Arcadia Biosciences, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

81-0571538

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

202 Cousteau Place, Suite 105

Davis, CA

 

95618

(Address of Principal Executive Offices)

 

(Zip Code)

(530) 756-7077

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

o

  

Accelerated filer

 

o

 

 

 

 

Non-accelerated filer

 

o (Do not check if a smaller reporting company)

  

Smaller reporting company

 

x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x

As of April 29, 2016, the number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 44,252,896.

 

 

 


Arcadia Biosciences, Inc.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2016

INDEX

 

 

 

 

 

 

 

Page

Part I —

 

Financial Information

 

1

 

 

 

 

 

 

 

Item 1.

 

Condensed Consolidated Financial Statements:

 

1

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

1

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

 

2

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

3

 

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

4

 

 

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

13

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

21

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

21

 

 

 

 

Part II —

 

Other Information

 

22

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

22

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

22

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

40

 

 

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

40

 

 

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

40

 

 

 

 

 

 

 

Item 5.

 

Other Information

 

40

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

40

 

 

 

 


ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

Arcadia Biosciences, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share data)

 

 

 

March 31, 2016

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

29,540

 

 

$

23,973

 

Short-term investments

 

 

20,654

 

 

 

26,270

 

Accounts receivable

 

 

587

 

 

 

706

 

Unbilled revenue

 

 

106

 

 

 

82

 

Inventories — current

 

 

316

 

 

 

294

 

Prepaid expenses and other current assets

 

 

1,332

 

 

 

692

 

Total current assets

 

 

52,535

 

 

 

52,017

 

Property and equipment, net

 

 

656

 

 

 

585

 

Inventories — noncurrent

 

 

1,831

 

 

 

1,867

 

Long-term investments

 

 

14,907

 

 

 

19,748

 

Other noncurrent assets

 

 

176

 

 

 

25

 

Total assets

 

$

70,105

 

 

$

74,242

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

2,792

 

 

$

2,423

 

Amounts due to related parties

 

 

13

 

 

 

19

 

Unearned revenue — current

 

 

1,353

 

 

 

1,008

 

Total current liabilities

 

 

4,158

 

 

 

3,450

 

Notes payable

 

 

24,978

 

 

 

24,930

 

Unearned revenue — noncurrent

 

 

2,492

 

 

 

2,637

 

Other noncurrent liabilities

 

 

3,000

 

 

 

3,000

 

Total liabilities

 

 

34,628

 

 

 

34,017

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

Common stock, $0.001 par value—400,000,000 and 400,000,000 shares authorized

   as of March 31, 2016 and December 31, 2015; 44,248,893 and 44,184,195 shares

   issued and outstanding as of March 31, 2016 and December 31, 2015

 

 

44

 

 

 

44

 

Additional paid-in capital

 

 

172,580

 

 

 

172,222

 

Accumulated deficit

 

 

(137,116

)

 

 

(131,926

)

Accumulated other comprehensive loss

 

 

(31

)

 

 

(115

)

Total stockholders’ equity

 

 

35,477

 

 

 

40,225

 

Total liabilities and stockholders’ equity

 

$

70,105

 

 

$

74,242

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

1


Arcadia Biosciences, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands, except share and per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Revenues:

 

 

 

 

 

 

 

 

Product

 

$

255

 

 

$

81

 

License

 

 

152

 

 

 

158

 

Contract research and government grants

 

 

445

 

 

 

576

 

Total revenues (which includes $23 and $23

   from related parties — Note 12)

 

 

852

 

 

 

815

 

Operating expenses:

 

 

 

 

 

 

 

 

Cost of product revenues

 

 

147

 

 

 

56

 

Research and development

 

 

2,202

 

 

 

1,832

 

Selling, general and administrative

 

 

3,436

 

 

 

2,638

 

Total operating expenses

 

 

5,785

 

 

 

4,526

 

Loss from operations

 

 

(4,933

)

 

 

(3,711

)

Interest expense

 

 

(327

)

 

 

(467

)

Other income (expense), net

 

 

76

 

 

 

(1,396

)

Net loss before income taxes

 

 

(5,184

)

 

 

(5,574

)

Income tax provision

 

 

(6

)

 

 

(229

)

Net loss

 

 

(5,190

)

 

 

(5,803

)

Accretion of redeemable convertible preferred stock to

   redemption value

 

 

 

 

 

(1,695

)

Deemed dividends to warrant holder

 

 

 

 

 

(197

)

Net loss attributable to common stockholders

 

$

(5,190

)

 

$

(7,695

)

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.12

)

 

$

(3.71

)

Weighted-average number of shares used in per share

   calculations:

 

 

 

 

 

 

 

 

Basic and diluted

 

 

44,215,156

 

 

 

2,075,407

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

Unrealized gains on available-for-sale securities

 

 

84

 

 

 

 

Other comprehensive income

 

 

84

 

 

 

 

Comprehensive loss attributable to common stockholders

 

$

(5,106

)

 

$

(7,695

)

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

2


Arcadia Biosciences, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(5,190

)

 

$

(5,803

)

Adjustments to reconcile net loss to cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

67

 

 

 

72

 

Net amortization of investment premium

 

 

76

 

 

 

 

Stock-based compensation

 

 

221

 

 

 

387

 

Change in fair value of derivative liabilities related to convertible promissory notes

 

 

 

 

 

1,399

 

Accretion of debt discount

 

 

48

 

 

 

141

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

119

 

 

 

892

 

Unbilled revenue

 

 

(24

)

 

 

210

 

Inventories

 

 

14

 

 

 

(49

)

Prepaid expenses and other current assets

 

 

(641

)

 

 

24

 

Other noncurrent assets

 

 

(152

)

 

 

8

 

Accounts payable and accrued expenses

 

 

414

 

 

 

235

 

Amounts due to related parties

 

 

(7

)

 

 

22

 

Unearned revenue

 

 

200

 

 

 

(136

)

Net cash used in operating activities

 

 

(4,855

)

 

 

(2,598

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(137

)

 

 

(7

)

Proceeds from sales and maturities of investments

 

 

10,465

 

 

 

 

Net cash provided by (used in) investing activities

 

 

10,328

 

 

 

(7

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Payments of IPO issuance costs

 

 

 

 

 

(1,238

)

Payments of debt issuance costs

 

 

(45

)

 

 

 

Proceeds from exercise of stock options and ESPP purchases

 

 

139

 

 

 

2

 

Payments on notes payable and convertible promissory notes

 

 

 

 

 

(1,452

)

Net cash provided by (used in) financing activities

 

 

94

 

 

 

(2,688

)

Net increase (decrease) in cash and cash equivalents

 

 

5,567

 

 

 

(5,293

)

Cash and cash equivalents — beginning of period

 

 

23,973

 

 

 

16,571

 

Cash and cash equivalents — end of period

 

$

29,540

 

 

$

11,278

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

193

 

 

$

510

 

Cash paid for income taxes

 

$

1

 

 

$

148

 

NONCASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Accretion of redeemable convertible preferred stock

 

$

 

 

$

1,695

 

Change in deferred offering costs included in accounts payable and accrued expenses

 

$

 

 

$

(264

)

Purchases of property and equipment included in accounts payable and accrued expenses

 

$

1

 

 

$

 

Deemed dividend to common stock warrant holder

 

$

 

 

$

197

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

3


Arcadia Biosciences, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Description of Business and Basis of Presentation

Organization

Arcadia Biosciences, Inc. (the “Company”), was incorporated in the state of Arizona in 2002 and maintains its headquarters in Davis, California, with additional facilities in Seattle, Washington; Phoenix, Arizona; and American Falls, Idaho. The Company was reincorporated in Delaware in March 2015.

The Company pursues agriculture-based biotechnology business opportunities that improve the environment and human health. The Company is an agricultural biotechnology trait company with an extensive and diversified portfolio of late-stage crop productivity and product quality traits addressing multiple crops that supply the global food and feed markets. Its traits are focused on high-value enhancements that increase crop yields by enabling plants to more efficiently manage environmental and nutrient stresses, and that enhance the quality and value of agricultural products.

In February 2012, the Company formed Verdeca LLC (“Verdeca”, see Note 6), which is jointly owned with Bioceres, Inc. (“Bioceres”), a U.S. wholly owned subsidiary of Bioceres, S.A., an Argentine corporation. Bioceres, S.A. is an agricultural investment and development cooperative. Verdeca was formed to develop and deregulate soybean varieties using both partners’ agricultural technologies.

Reverse Stock Split

In April 2015, the Company’s board of directors approved an amended and restated certificate of incorporation to effect a reverse split on the Company’s issued and outstanding common stock at a one-for-four ratio. In May 2015, the Company’s stockholders approved the certificate of amendment, which the Company filed on May 8, 2015 with the Secretary of State of Delaware to effect the reverse split. The par value and authorized shares of common stock and convertible preferred stock were not adjusted as a result of the reverse split. All issued and outstanding common stock, options to purchase common stock and per share amounts contained in the consolidated financial statement have been retroactively adjusted to reflect the reverse stock split for all periods presented. The consolidated financial statements have also been retroactively adjusted to reflect a proportional adjustment for the conversion ratio for each series of redeemable convertible preferred stock and convertible preferred stock.

Initial Public Offering

In May 2015, the Company completed an initial public offering (the “IPO”) and subsequently in June 2015, the Company completed the sale of additional shares upon exercise of the underwriters’ over-allotment option. In connection with the IPO, the Company issued 8,528,306 shares of common stock at $8.00 per share, which raised $58.4 million in proceeds, net of underwriting discounts and commissions of $4.8 million and offering expenses of $5.0 million. At the closing of the IPO, all of the outstanding shares of convertible preferred stock and redeemable convertible preferred stock were automatically converted into 32,972,793 shares of common stock. Following the IPO, there were no shares of preferred stock outstanding.

In connection with the IPO, the Company filed an Amended and Restated Certificate of Incorporation to change the authorized capital stock to 400,000,000 shares designated as common stock and 20,000,000 shares designated as preferred stock, all with a par value of $0.001 per share.

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and Verdeca LLC in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial statements and are in the form prescribed by the Securities and Exchange Commission (the “SEC”) in instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the Company’s financial position, results of operations and cash flows for the periods indicated. All material intercompany accounts and transactions have been eliminated in consolidation. The Company uses a qualitative approach in assessing the consolidation requirement for variable interest entities (“VIEs”). This approach focuses on determining whether the Company has the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance and whether the Company has the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the VIE. For all periods presented, the Company has determined that it is the primary beneficiary of

4


Verdeca, which is a VIE. The Company evaluates its relationships with the VIEs upon the occurrence of certain significant events that affect the design, structure or other factors pertinent to the primary beneficiary determination. Interim results are not necessarily indicative of results for any other interim period or for a full fiscal year. The information included in these consolidated financial statements and notes thereto should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein and Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto for the fiscal year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K, filed on March 8, 2016.

 

 

2. Recent Accounting Pronouncements

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update impacts classification, additional fair value measurement, impairment assessment of equity investments and current required disclosures. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted if the entity meets certain early application guidance. The Company is evaluating the impact of the adoption of ASU 2016-01 on its operating results and financial position.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Based on the new standard, leases would recognize lease assets and lease liabilities for those leases classified as operating leases under previous GAAP. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early application is permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its Consolidated Balance Sheets.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) and ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The revenue-related update does not change the core principal of the guidance but provides clarification on the implementation guidance on principal versus agent considerations. The standard’s effective date is the same as the effective date of ASU 2014-09, which is January 1, 2018. The Company does not anticipate that the adoption of this ASU will materially change the presentation of its consolidated financial statements. The compensation-related standard involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The standard is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company is evaluating the impact of the adoption of ASU 2016-09 on its consolidated financial statements.

 

 

3. SONOVA® Gamma Linolenic Acid (“GLA”) Safflower Oil Inventory

Raw materials inventories consist primarily of seed production costs incurred by the Company’s contracted cooperators. Finished goods inventories consist of GLA oil that is available for sale. Inventories consist of the following (in thousands):

 

 

 

March 31, 2016

 

 

December 31, 2015

 

Raw materials

 

$

719

 

 

$

665

 

Finished goods

 

 

1,428

 

 

 

1,496

 

Inventories

 

$

2,147

 

 

$

2,161

 

 

The Company had inventory reserves for excess and slow-moving inventory of $2.3 million as of March 31, 2016 and December 31, 2015.

 

 

4. Investments and Fair Value of Financial Instruments

Available-for-Sale Investments

The Company classified cash equivalents, short-term and long-term investments as “available-for-sale.” Investments are free of trading restrictions. The investments are carried at fair value, based on quoted market prices or other readily available market information. Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive income (loss), which is reflected as a separate component of stockholder’s equity (deficit) in the Consolidated Balance Sheets. Gains and losses are recognized when realized in the Consolidated Statements of Operations and Comprehensive Loss. The Company did not have available-for-sale securities prior to third quarter of 2015.

5


The Company’s investments in fixed income securities consisted of the following as of March 31, 2016:

 

(Dollars in thousands)

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Estimated Fair Value

 

Assets at Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

28,489

 

 

$

 

 

$

 

 

$

28,489

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of Deposit

 

 

2,557

 

 

 

 

 

 

(6

)

 

 

2,551

 

U.S. government securities

 

 

16,360

 

 

 

2

 

 

 

(6

)

 

 

16,356

 

U.S. government agency securities

 

 

1,747

 

 

 

 

 

 

 

 

 

1,747

 

Long-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of Deposit

 

 

2,407

 

 

 

1

 

 

 

(4

)

 

 

2,404

 

U.S. government securities

 

 

7,521

 

 

 

 

 

 

(13

)

 

 

7,508

 

U.S. government agency securities

 

 

5,000

 

 

 

 

 

 

(5

)

 

 

4,995

 

Total Assets at Fair Value

 

$

64,081

 

 

$

3

 

 

$

(34

)

 

$

64,050

 

 

The Company did not have any investment categories that were in a continuous unrealized loss position for more than twelve months as of March 31, 2016. The unrealized gains and losses amounts above are included in AOCI. All long-term investments will mature in 2017.

As of March 31, 2016, for fixed income securities that were in unrealized loss positions, the Company has determined that (i) it does not have the intent to sell any of these investments, and (ii) it is not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis. The Company anticipates that it will recover the entire amortized cost basis of such fixed income securities and has determined that no other-than-temporary impairments associated with credit losses were required to be recognized during the three months ended March 31, 2016.

Fair Value Measurement

Fair value accounting is applied for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis. Assets and liabilities recorded at fair value in the consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, which are directly related to the amount of subjectivity, associated with the inputs to the valuation of these assets or liabilities are as follows:

 

·

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company can access at the measurement date.

 

·

Level 2 inputs are observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

·

Level 3 inputs are unobservable inputs for the asset or liability.

The carrying values of the Company’s financial instruments, including cash equivalents, accounts receivable, and accounts payable, approximated their fair values due to the short period of time to maturity or repayment.

6


The fair value of the available-for-sale investments at March 31, 2016 were as follows:

 

 

 

Fair Value Measurements at March 31, 2016

 

(Dollars in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets at Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

28,489

 

 

$

 

 

$

 

 

$

28,489

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of Deposit

 

 

 

 

 

2,552

 

 

 

 

 

 

2,552

 

U.S. government securities

 

 

16,356

 

 

 

 

 

 

 

 

 

16,356

 

U.S. government agency securities

 

 

 

 

 

1,746

 

 

 

 

 

 

1,746

 

Long-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of Deposit

 

 

 

 

 

2,404

 

 

 

 

 

 

2,404

 

U.S. government securities

 

 

7,508

 

 

 

 

 

 

 

 

 

7,508

 

U.S. government agency securities

 

 

 

 

 

4,995

 

 

 

 

 

 

4,995

 

Total Assets at Fair Value

 

$

52,353

 

 

$

11,697

 

 

$

 

 

$

64,050

 

 

The carrying values of the Company’s promissory notes, convertible promissory notes, and notes payable approximate their fair values for the three ended March 31, 2016 and 2015 as the market rates currently available to the Company and other assumptions have not changed significantly.  These were classified as Level 2.

The Company’s Level 3 liabilities measured and recorded on a recurring basis consist of derivative liabilities related to the convertible promissory note. The following table sets forth a summary of the changes in the fair value and other adjustments of these derivative liabilities (in thousands):

 

 

 

Three Months Ended

March 31,

 

 

 

2016

 

 

2015

 

Beginning balance

 

$

 

 

$

1,580

 

Change in fair value and other adjustments

 

 

 

 

 

1,399

 

Ending balance

 

$

 

 

$

2,979

 

 

 

5. Investment in Unconsolidated Entity

The Company owns a 35% ownership position in Limagrain Cereal Seeds LLC (“LCS”). The remaining 65% of LCS is owned by Vilmorin & Cie, a major global producer and marketer of field crop and vegetable seeds and affiliate of Groupe Limagrain (“Limagrain”), through its wholly owned subsidiary, Vilmorin USA (“VUSA”). LCS improves and develops new wheat and barley varieties utilizing genetic and breeding resources, as well as advanced technologies from Limagrain and the Company. Funding for LCS comes from an initial pro rata equity investment from each partner and with subsequent financing in the form of debt from VUSA. As of March 31, 2016, the debt balance was $20.0 million with a maturity date of July 15, 2016. It is the Company’s expectation that VUSA will provide LCS with additional debt financing and extend maturity for repayment as needed. Should the debt be converted into equity or additional capital in the form of equity be necessary to support the operations of LCS, the Company has the option to fund its pro rata share of such cash or elect to have its ownership percentage diluted subject to an agreed valuation. As of March 31, 2016 and December 31, 2015, the Company’s investment in LCS has been reduced to $0 as a result of its equity method loss recognition.

 

 

6. Variable Interest Entity

In February 2012, the Company formed Verdeca LLC, which is jointly owned with Bioceres, Inc. ("Bioceres"), a U.S. wholly owned subsidiary of Bioceres, S.A., an Argentine corporation. Bioceres, S.A. is an agricultural investment and development cooperative owned by approximately 250 shareholders, including some of South America’s largest soybean growers. Verdeca was formed to develop and deregulate soybean varieties using both partners’ agricultural technologies.

Both the Company and Bioceres incur expenses in support of specific activities agreed, as defined by joint work plans, which apply fair market value to each partner’s activities. Unequal contributions of services are equalized by the partners through cash payments. Verdeca is not the primary obligor for these activities performed by the Company or Bioceres. An agreement executed in conjunction with the formation of Verdeca specified that if Bioceres determines it requires cash to fund its contributed services (subject to certain annual limits), Bioceres, S.A. may elect to sell shares of its common stock to the Company for an amount not exceeding $5.0 million in the aggregate over a four-year period. The Company determined that its commitment to purchase common

7


stock in Bioceres, S.A. as a means to provide capital to Verdeca resulted in a de facto agency relationship between the Company and Bioceres. The Company considers qualitative factors in assessing the primary beneficiary which include understanding the purpose and design of the VIE, associated risks that the VIE creates, activities that could be directed by the Company, and the expected relative impact of those activities on the economic performance of the VIE. Based on an evaluation of these factors, the Company concluded that it is the primary beneficiary of Verdeca.

As a result of the agreement to fund future contributions by Bioceres, Inc., the Company purchased common stock of Bioceres, S.A. in the aggregate amount of $2.0 million between January 2013 and August 2014. The Company’s maximum commitment to purchase stock in Bioceres, S.A. under the original funding agreement amounted to $2.0 million for 2014 and $1.2 million for 2015. In September 2014, the Company and Bioceres, S.A. entered into an agreement to reduce the annual commitment for 2014 to $500,000 and to eliminate the 2015 commitment. In consideration for these amendments, the Company surrendered 1,832 shares of Bioceres, S.A. held by the Company. The Company recorded an expense of $1.5 million related to this agreement, which is classified as research and development expense in the Consolidated Statement of Operations and Comprehensive Loss for the year ended December 31, 2014.

In addition, the Company had a right to require Bioceres, S.A. to repurchase any shares of common stock then owned by the Company upon the occurrence of certain events specified in the agreement, and similarly, Bioceres, S.A. had the right to require the Company to sell back any shares of common stock owned by the Company under certain circumstances. The Company entered into a subcontracted research agreement in 2015 with Bioceres S.A. and Bioceres Semillas, S.A., a subsidiary of Bioceres S.A. Per the agreement, the Company could pay for these services with a combination of cash and Bioceres S.A. shares. As of December 31, 2015, the liability for the aforementioned research agreement was settled with $205,000 of cash and the remaining 632 Bioceres S.A. shares, with a fair value of $500,000, held by the Company, thus reducing the cost investment on the Company’s Condensed Consolidated Balance Sheet to $0.

Under the terms of the joint development agreement, the Company has incurred direct expenses and allocated overhead in the amounts of $40,000 and $163,000 for the three months ended March 31, 2016 and 2015, respectively.  

 

 

7. Debt

Long-term Debt

Long-term debt consisted of the following (in thousands):

 

 

 

March 31, 2016

 

 

December 31, 2015

 

Notes payable

 

$

24,978

 

 

$

24,930

 

Total

 

 

24,978

 

 

 

24,930

 

Less current portion

 

 

 

 

 

 

Long-term portion

 

$

24,978

 

 

$

24,930

 

 

In July 2012, a 36­month $8.0 million term note was executed with Moral Compass Corporation (“MCC”), the Company’s largest stockholder, and was subordinate to existing promissory notes and convertible promissory notes. The interest rate on the loan was prime plus 2%, with interest only paid monthly in arrears. The principal was due in full at maturity in July 2015. On November 10, 2014, the Company and MCC entered into an amendment to the term loan under which the maturity date was extended to the first to occur of the following dates: (i) April 1, 2016, (ii) the date of an Event of Default, or (iii) a date designated by MCC, by notice to the Company, no earlier than the 20th day following consummation by the Company of an equity financing with gross proceeds to the Company of at least $50 million. In addition, the interest rate remained at prime plus 2% through December 31, 2014, and was amended to increase to 11% per annum thereafter until maturity. The balance of the note, inclusive of accrued interest, was approximately $8.0 million as of December 31, 2014. Accrued interest of $36,000 was recorded in amounts due to related parties on the balance sheet as of December 31, 2014. This term note, including the principal balance of $8.0 million and accrued interest and prepayment fee of $148,000 was paid in full in April 2015. A prepayment fee of $80,000 was recorded as a loss on extinguishment of debt.

Promissory notes were executed with an unrelated party in August 2013 and November 2013 in the amounts of $2.0 million and $1.1 million, respectively. The interest rate on the notes was 10% with principal and interest due in 36 equal monthly installments over the course of their respective three­year terms. These notes, including the aggregate outstanding principal balance of $1.6 million and accrued interest and prepayment fee of $44,000, were paid in full in April 2015. A prepayment fee of $37,000 was recorded as a loss on extinguishment of debt.

8


In April 2015, the Company entered into a loan and security agreement with an unrelated party, under which the Company incurred an aggregate principal amount of $20.0 million in term loan borrowings (the “Term Loans”), proceeds of which were used to repay existing debt with MCC and an unrelated party as described above. Under this loan agreement, interest on the Term Loans accrued at a rate per annum equal to the greater of (i) 9.0% and (ii) a fluctuating rate of interest equal to three­month LIBOR as in effect from time to time plus 8.74%. The Company was required to make interest­only payments under this agreement from the drawdown dates through April 30, 2016, subject to certain conditions for extension to October 31, 2016. . This agreement provided for a right of prepayment with associated prepayment fees and an additional end-of-term payment of $600,000 due upon maturity or when the Term Loans are prepaid in whole or in part to the lenders.

As part of the Term Loans, the Company also issued the lenders warrants to purchase 1,503,760 shares of its common stock at an exercise price of $5.32 per share, which were only exercisable in the event that an IPO was not completed prior to September 30, 2015 and would have remained exercisable until November 1, 2018. The Company initially recorded $356,000 for the fair value of the warrants as a liability in the Consolidated Balance Sheets, which was subject to subsequent remeasurement for changes in fair value until exercise or expiration. In addition, the Company concluded that the interest rate adjustment upon non­occurrence of an IPO was an embedded derivative and recorded $81,000 for the fair value of the embedded derivative as a liability, which was subject to subsequent remeasurement for changes in fair value until exercise or expiration. The proceeds received under the Term Loans, less fees paid to the lender of $290,000, were allocated to the warrant liability and the embedded derivative liability based on their initial fair values with the residual amount recorded as notes payable. The resulting debt discount was to be amortized as interest expense over the term of the Term Loans using the effective interest method. The interest expense related to the debt discount was $301,000 for the year ended December 31, 2015.

In May 2015, upon the completion of the IPO, the warrants were terminated and the right to adjust the interest rate upon non­occurrence of an IPO was relinquished. As such, the Company released the initial fair value of the warrants and the embedded derivative of $437,000 to other income. The Company recognized interest expense inclusive of the debt discount related to the combined Term Loans of $1.5 million for the year ended December 31, 2015.

Two convertible promissory notes (“Convertible Promissory Notes”) and a warrant purchase agreement were executed in September 2013 and December 2013 with Mahyco International, an affiliate of Maharashtra Hybrid Seeds Company Ltd. (“Mahyco”), which is a licensee of the Company’s technologies. The Convertible Promissory Notes were issued in the amounts of $500,000 in September 2013 and $4.5 million in December 2013. The interest rate on the Convertible Promissory Notes was prime plus 2%, compounded monthly over the course of the five­year terms ending September and December 2018, and was payable in full on the maturity dates. At any time during the term, the lender could convert all or part of the outstanding balance of the Convertible Promissory Notes (including principal and accrued but unpaid interest) into common stock of the Company at $16.52 per share through December 2016 and at 90% of the most recent offering thereafter.

At its option, Mahyco International could offset future fee payments due from Mahyco to the Company against the outstanding balance of the Convertible Promissory Notes (including principal and accrued but unpaid interest). Mahyco International had the right to demand immediate settlement of a portion of the outstanding balance of the Convertible Promissory Notes, subject to mutual agreement by the Company. The Company recorded a derivative liability for the initial fair value of the settlement obligation. In addition, Mahyco International had the right, at its option, to place another $5.0 million of convertible debt with the Company during the five­year term. The Company recorded an additional derivative liability for the initial fair value of the Company’s obligation to issue the additional $5.0 million of convertible promissory notes. Changes in the fair value of the derivative liabilities were recorded to other income (expense), net in the Consolidated Statement of Operations and Comprehensive Loss.

In conjunction with the Convertible Promissory Notes, the Company issued to Mahyco International a warrant (the “Mahyco Warrant”) to purchase 75,666 shares of common stock at an exercise price of $16.52. The Mahyco Warrant was issued in December 2013, vested immediately and remains exercisable throughout the original five­year term. The Company allocated the gross proceeds from the Convertible Promissory Notes to the derivative liabilities based on their initial fair values and the remainder of the proceeds to the Convertible Promissory Notes and Mahyco Warrant on a relative fair value basis. The amount allocated to the Mahyco Warrant was recorded as a debt discount to be amortized as interest expense over the estimated term of the note and warrant purchase agreement using the effective interest rate method. The Company recognized interest expense related to the Convertible Promissory Notes of $276,000 for the three months ended March 31, 2015. In March 2015, the parties amended the Mahyco Warrant to clarify certain terms relating to expiration. The Company accounted for the amendment as a modification with the incremental increase in fair value of $197,000 as of the amendment date, which was accounted for as a deemed dividend to the warrant holder.

In December 2015, the Company entered into a new loan and security agreement with Silicon Valley Bank (the “Bank”) providing for a senior secured term loan facility in the amount of $25.0 million. Proceeds were used by the Company to repay all existing debt including the Term Loans’ principal balance of $20.0 million and related accrued interest, prepayment and other fees in the amount of $1.3 million and the Convertible Promissory Notes’ principal balance of $3.7 million and associated accrued interest of $154,000. The Term Loans’ prepayment and end of term fees of $1.2 million were recorded as a loss on extinguishment of debt, along

9


with the $427,000 unamortized debt discount and $58,000 of deferred loan issuance fees. In addition, Mahyco International’s option to place another $5.0 million of convertible debt was surrendered with the repayment and the related derivative liabilities totaling $1.6 million were released and recorded as a gain on extinguishment of debt.  

Under this new loan and security agreement, interest accrues at a floating rate per annual rate equal to nine tenths of one percentage point (0.90%) above the prime rate published from time to time in The Wall Street Journal. The agreement requires the Company to make monthly interest-only payments through December 2017. After this date, the Company is required to make thirty-six (36) equal monthly installments of principal, plus accrued interest. The Company’s final payment, due on the maturity date of December 1, 2020, shall include all outstanding principal and accrued and unpaid interest plus a final payment equal to $600,000. In the event the loan is repaid prior to its maturity, a prepayment fee is due equal to 3% of the outstanding principal amount if prepayment occurs after December 29, 2016 but on or before December 29, 2017, and 1% of the outstanding principal amount if the prepayment occurs after December 29, 2017. The loan has been recorded on the Consolidated Balance Sheet as of December 31, 2015, net of approximately $70,000 related to issuance fees. The Company recognized interest expense of $327,000 for the three months ended March 31, 2016. Of the total interest expense recognized, $49,000 was related to the amortization of the debt discount and end of term payment.

This loan and security agreement contains customary events of default and covenants, including a financial covenant that requires the Company to maintain either a liquidity ratio (defined as the ratio of the Company’s cash, cash equivalents and net accounts receivable to the Company’s obligation owed to the Bank) of at least 1.4:1.0, or to cash collateralize 100% of the Company’s obligations to the Bank. The Company’s obligations to the Bank are secured by substantially all of the Company’s assets, excluding intellectual property. As of March 31, 2016, the Company is in compliance with the covenant.

 

 

8. Stock-Based Compensation

Stock Incentive Plans

The Company has two equity incentive plans: the 2006 Stock Plan (“2006 Plan”) and the 2015 Omnibus Equity Incentive Plan (“2015 Plan”).

In 2006, the Company adopted the 2006 Plan, which provided for the granting of stock options to executives, employees, and other service providers under terms and provisions established by the Board of Directors. The Company granted options under the 2006 Plan until May 2015, when it was terminated as to future awards, although it continues to govern the terms of options that remain outstanding under the 2006 Plan. Certain options vested upon completion of the IPO and the remaining unvested options vest over original service periods between two-and-a-quarter and four years. The 2015 Plan became effective upon the IPO in May 2015 and all shares that were reserved, but not issued, under the 2006 Plan were assumed by the 2015 Plan. Upon effectiveness, the 2015 Plan had 3,087,729 shares of common stock reserved for future issuance, which included 212,729 shares under the 2006 Plan that were transferred to and assumed by the 2015 Plan. The 2015 Plan provides for automatic annual increases in shares available for grant, beginning on January 1, 2016. In addition, shares subject to awards under the 2006 Plan that are forfeited or canceled will be added to the 2015 Plan. The 2015 Plan provides for the grant of incentive stock options (“ISOs”), nonstatutory stock options (“NSOs”), restricted stock awards, stock units, stock appreciation rights, and other forms of equity compensation, all of which may be granted to employees, officers, non-employee directors, and consultants. The ISOs and NSOs will be granted at a price per share not less than the fair value at date of grant. Options granted generally vest over a four-year period, with 25% vesting at the end of one year and the remaining vesting monthly thereafter. Options granted generally are exercisable for up to 10 years.

As of March 31, 2016, a total of 4,829,040 shares of common stock were reserved for issuance under the 2015 Plan, of which 4,784,040 shares of common stock are available for future grant.  As of March 31, 2016, a total of 3,326,795 and 45,000 options are outstanding under the 2006 and 2015 Plans, respectively.

A summary of activity under the stock incentive plans is as follows (in thousands, except share data and price per share):

 

 

 

Shares

Subject to

Outstanding

Options

 

 

Weighted-

Average Exercise

Price Per Share

 

 

Aggregate

Intrinsic

Value

 

Outstanding — Balance at December 31, 2015

 

 

3,427,509

 

 

$

3.76

 

 

$

3,707

 

Options granted

 

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(29,939

)

 

 

1.66

 

 

 

 

 

Options cancelled and forfeited

 

 

(25,775

)

 

 

3.35

 

 

 

 

 

Outstanding — Balance at March 31, 2016

 

 

3,371,795

 

 

$

3.78

 

 

$

2,989

 

Options vested and exercisable — March 31, 2016

 

 

3,142,149

 

 

$

3.53

 

 

$

2,989

 

10


 

As of March 31, 2016, there was $511,000 of unrecognized compensation cost related to unvested stock-based compensation grants that will be recognized over the weighted-average remaining recognition period of 1.82 years.  

The weighted-average estimated grant-date fair value of employee stock options granted during the three months ended March 31, 2015 was $4.62.  There were no options granted during the three months ended March 31, 2016.

Employee Stock Purchase Plan

Concurrent with the effectiveness of the Company’s registration statement on Form S-1 on May 14, 2015, the Company’s 2015 Employee Stock Purchase Plan (“ESPP”) became effective. The ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, subject to any plan limitations. After the first offering period, which began on May 14, 2015 and ended on February 1, 2016, the ESPP provides for six-month offering periods, and at the end of each offering period, employees are able to purchase shares at 85% of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last day of the offering period. As of March 31, 2016, the number of shares of common stock reserved for future issuance under the ESPP is 1,027,741. The ESPP provides for automatic annual increases in the shares available for purchase beginning on January 1, 2016. As of March 31, 2016, 34,759 shares had been issued under the ESPP. The Company recorded $30,000 of compensation expense for the three months ended March 31, 2016.

 

 

9. Income Taxes

Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items that are recorded in the interim period. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known or as the tax environment changes.

The interim financial statement provision for income taxes expense is different from the amounts computed by applying the United States federal statutory income tax rate of 34%. The Company’s effective tax rate (ETR) was -0.1% and -4.1% for the three months ended March 31, 2016 and 2015, respectively. The difference between the effective tax rate and the federal statutory rate of 34% was primarily due to the full valuation allowance recorded on the Company’s net deferred tax assets and foreign withholding taxes.

As of March 31, 2016, there have been no material changes to the Company’s uncertain tax positions.

 

 

10. Contingent Liability Related to the Anawah Acquisition

On June 15, 2005, the Company completed its agreement and plan of merger and reorganization with Anawah, Inc. (“Anawah” or “Sellers”), to purchase the Sellers’ food and agricultural research company through a stock purchase. Pursuant to the merger with Anawah, the Company incurred a contingent liability not to exceed $5.0 million. This liability represents amounts to be paid to Anawah’s previous stockholders for cash collected on revenue recognized by the Company upon commercial sale of certain specific products developed using technology acquired in the purchase. As of December 31, 2010, the Company ceased activities relating to three of the six Anawah product programs and, as a result, reduced the contingent liability to $3.0 million. As of March 31, 2016, the Company believes the contingent liability is appropriate as it continues to pursue three development programs using this technology.

 

 

11. Net Loss per Share

Basic net loss per share is calculated by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period and excludes any dilutive effects of stock-based awards and warrants. Diluted net loss per share attributable to common stockholders is computed giving effect to all potentially dilutive common shares, including common stock issuable upon exercise of stock options and warrants and conversion of convertible promissory notes, redeemable convertible preferred stock and convertible preferred stock. As the Company had net losses for the three months ended March 31, 2016 and 2015, all potentially dilutive common shares were determined to be anti-dilutive.

11


Securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows (in shares):

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Convertible preferred stock

 

 

 

 

 

23,385,029

 

Redeemable convertible preferred stock

 

 

 

 

 

8,938,094

 

Options to purchase common stock

 

 

3,371,795

 

 

 

4,062,172

 

Warrants to purchase common stock

 

 

1,336,894

 

 

 

1,336,894

 

Convertible notes

 

 

 

 

 

312,156

 

Total

 

 

4,708,689

 

 

 

38,034,345

 

 

 

12. Related-Party Transactions

The Company’s related parties include MCC, Blue Horse Labs, Inc. (“BHL”), and Limagrain. BHL is deemed a related party as a result of its existing contractual relationship with the Company and because a Director of the Company also serves as the Treasurer of BHL and as an Officer and Director of MCC, the Company’s controlling stockholder as of March 31, 2016.

Transactions with related parties are reflected in the condensed consolidated financial statements under amounts due to or from related parties and notes payable to related party. Outlined below are details of agreements between the Company and its related parties:

A term note was executed with MCC in July 2012 for $8.0 million (see Note 7). This note was paid off in full in April 2015. The interest expense for the three months ended March 31, 2015 was $217,000.

Under a license agreement executed in 2003 and amended in 2009, BHL receives a single-digit royalty from the Company when revenue has been collected on product sales or for license payments from third parties that involve certain intellectual property developed under research funding from BHL. Royalty fees due to BHL were $13,000 and $19,000 as of March 31, 2016 and December 31, 2015, respectively, and are included in the consolidated balance sheets as amounts due to related parties.

License agreements were executed with Limagrain, a stockholder of the Company, in September 2009 and February 2011. The agreements license certain of the Company’s traits to Limagrain and include up-front license fees, annual license fees, milestone fees and value-sharing payments. The Company recognized $23,000 of revenue under these agreements in each of the three months ended March 31, 2016 and 2015. No amounts were due from Limagrain as of March 31, 2016 and December 31, 2015.

 

 

13. Subsequent Events

During the first quarter, the Company conducted a comprehensive review of development program priorities and a reprioritization of its pipeline development activities, which identified a number of projects where resources should be reduced, eliminated or reallocated.  As a result, seven staff positions at different levels of the Company were eliminated on April 22, 2016, representing approximately 8% of its current workforce.

 

 

 

12


ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk Factors.”

Special Note Regarding Forward-Looking Statements

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 under Part II, Item 1A 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

Overview

We are a leading agricultural biotechnology trait company with an extensive and diversified portfolio of late-stage yield and product quality traits addressing multiple crops that supply the global food and feed markets. Our traits are focused on high-value enhancements that increase crop yields by enabling plants to more efficiently manage environmental and nutrient stresses, and that enhance the quality and value of agricultural products. Our traits increase value not only for farmers, but also for users of agricultural products. Our target market is the $40.5 billion global seed market. Our goal is to increase the value of this market significantly by increasing yields in the more than $1.0 trillion market for the five largest global crops, and to capture a portion of the increased value.

Our crop yield traits are being utilized by our commercial partners to develop higher yielding seeds for the most widely grown global crops, including wheat, rice, soybean, corn, and sugarcane, as well as for other crops such as cotton, turf and trees. Our business model positions us at the nexus of basic research and commercial product development, as we apply our strong product development and regulatory capabilities to collaborate with, and leverage the skills and investments of, upstream basic research institutions and downstream commercial partners. We believe our approach significantly reduces risk and capital requirements, while simplifying and expediting the product development process. We also believe that our collaboration strategy leverages our internal capabilities, enabling us to capture much higher value than would otherwise be the case, and enabling our commercial partners to develop and commercialize products more cost-effectively.

We were incorporated in 2002 to pursue agricultural-based biotechnology business opportunities that improve the environment and human health, and in 2004, we entered into our first collaboration agreement with a potential commercial partner. In 2009, we completed the U.S. Food and Drug Administration, or FDA, regulatory process for our Sonova brand gamma linolenic acid safflower oil, called Sonova 400 GLA safflower oil, just six years after we first began developing the trait under a research and commercial agreement with Abbott. We introduced this product commercially in late 2010, and in 2014, we introduced Sonova Ultra GLA safflower oil, a more concentrated version of our Sonova 400 GLA safflower oil. We refer to these products as our Sonova products.

We have formed strategic partnerships and developed strong relationships with global agricultural leaders for development and commercialization of our traits in major crops and consumer products. Our collaborators include Limagrain (Vilmorin & Cie), Mahyco (Maharashtra Hybrid Seeds Company Limited), Dow AgroSciences, DuPont Pioneer (E.I. du Pont de Nemours and Company), SES Vanderhave, Genective (a joint venture between Limagrain and KWS SAAT), Scotts, U.S. Sugar, Abbott, Ardent Mills, Bioceres, and others. Additionally, in order to increase our participation in the value of two major crops, wheat and soybean, we have formed two joint ventures. Limagrain Cereal Seeds LLC is our joint venture with Limagrain for the development and commercialization of wheat and barley products for North America. Verdeca LLC is our joint venture with Bioceres for the development and deregulation of soybean traits globally. In April 2015, we entered into a collaboration agreement with Dow AgroSciences and Bioceres under which our Verdeca joint venture will collaborate with Dow AgroSciences on the development and deregulation of soybean traits on a global basis. In December 2015, we announced a strategic collaboration with Dow AgroSciences to

13


develop traits in corn. We intend to enter into future collaboration agreements and joint ventures depending on our assessment of which structure provides the best ratio of risk to investment return.

The process of developing and commercializing innovative traits and seed products requires significant time and investment. Our business model focuses on creating value by leveraging collaborator investments and capabilities upstream in basic research, and downstream in product development and commercialization. We bridge the gap between basic research and commercial development, reducing risk and adding value as a result. We reduce risk and avoid most of the costs associated with basic research by acquiring trait technologies that have already completed initial feasibility screening, thus achieving proof of concept, through basic research carried out elsewhere. We further develop these technologies by optimizing function and validating performance through intensive field trial testing in multiple crops. We then form collaborations with major seed and consumer product companies that develop and commercialize products incorporating our traits. As a result of our expertise and this additional development work, we are positioned to capture significantly greater payments in our downstream license and collaboration agreements than we believe is otherwise typical in our industry.

In certain instances, we may also work to complete the regulatory process to support the commercial launch of products containing our traits. We would do this in order to obtain a greater share of the economics of the commercial product. We intend to pace any regulatory investments so that we only make such investments after the performance risk for the seed trait has been significantly reduced through extensive field testing. We may pursue regulatory investments in these instances if we believe that they will result in a highly positive rate of return due to increased payments from our commercial partners or joint ventures.

Our commercial strategy aims to balance our near-term revenue goals with long-term value capture. Our trait license agreements with our commercial partners contain two main types of financial components:

 

·

A set of pre-commercialization payments from our commercial partners that are linked to their pursuit of technical and regulatory milestones under a well-defined diligence plan. The pre-commercialization payments typically include upfront and annual license fees, as well as multiple payments for key technical and development milestones such as demonstration of greenhouse efficacy, demonstration of field efficacy, regulatory submission, regulatory approval, and commercial launch. Under most of our license agreements, failure of our commercial partners to adhere to the diligence plan may result in a reduction, or elimination, of their license rights. The combination of diligence requirements and milestone payments motivates our commercial partners to develop and commercialize products containing our traits, while providing us with revenue to fund our development programs.

 

·

Once a product containing one or more of our traits is commercialized, we are entitled to receive a portion of the revenue that it generates for our commercial partner. For seeds incorporating valuable traits, farmers typically pay either a premium for the seed or a trait fee. This premium or trait fee represents the additional value generated for our commercial partner by our trait(s), and we receive a percentage of this additional value. Typically, our share of this value ranges from 15 to 20%, and it can increase to a range of 37 to 50% under certain agreements if we elect to co-invest in product development and/or deregulation. We expect that our participation in joint ventures will provide us with an opportunity to recognize additional value from our traits.

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 that 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.

Most of our agreements include the grant of exclusive rights to a particular trait for use in a particular crop within a defined geography. To date, we have not granted exclusive rights to all of our traits for use in a particular crop to a single partner and, likewise, we have not granted exclusive rights to utilize a particular trait in all crops to a single partner. Our approach to selecting commercial partners involves careful consideration of their market channels and capabilities to ensure that they are well matched to the trait, crop, and geography that form the foundation of our commercial relationship.

The process of discovering, developing, and commercializing a seed trait through either genetic modification or advanced breeding involves multiple phases and takes an average of 13 years from discovery to commercialization. The length of the process may vary depending on both the complexity of the trait and the type of crop involved. This long product development cycle is in large part attributable to the limitations of natural growing seasons and the impact of this on the time it takes to breed commercial seed products. For genetically modified, or GM, seeds, there is also a rigorous and lengthy regulatory process that operates in parallel to the later stages of the seed breeding process.

14


Since our inception, we have devoted substantially all of 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 Sonova products, and we do not anticipate generating any revenues from commercial product sales other than from sales of our Sonova products for at least the next three to five years. 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 $137.1 million as of March 31, 2016. We incurred net losses of $5.2 million and $5.8 million for the three months ended March 31, 2016 and 2015, 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 may need additional funding to support our operating activities.

Components of Our Statements of Operations Data

Revenues

We derive our revenues from product revenues, licensing agreements, contract research agreements, and government grants. We expect that over the next several years, a substantial majority of our revenues will consist of license revenues and contract research and government grant revenues until our license revenues increase with the introduction of our seed trait products to the market, if and when they are commercially available. Further, we expect that our license revenues will vary as we enter into new license agreements and with the timing of milestone payments and recognition of deferred upfront license fees under 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 delivery to our third-party distributors or customers. Our revenues will 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 generally recognize nonrefundable up-front license fees and guaranteed, time-based payments as revenue proportionally over the expected development period. We recognize annual license fees proportionally over the related term subject to cancellation provisions.

We recognize milestone payments as revenue when the related performance criteria are achieved. 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 revenues consist of amounts earned from performing contracted research primarily related to breeding programs or the genetic engineering of plants for third parties. We generally recognize revenue as these services are provided. 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 do not expect to generate any revenues from the sale of any such products for at least the next three to five years.

We receive payments from government entities in the form of government grants. Government grant revenues are recognized as eligible research and development expenses are incurred. 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.

15


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 to inventory reserve, 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. We expect our research and development expenses to increase on an absolute dollar basis for the foreseeable future, although our research and development expenses may increase significantly if we choose to accelerate certain research and development programs or if we elect to take a greater role in the regulatory and commercialization process with respect to one or more of our seed traits or products in development incorporating our seed traits. Our research and development expenses may also 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.

Interest Expense

Interest expense consists primarily of contractual interest and amortization of debt discounts on the borrowings under loan agreements.

Other Income (Expense), Net

Other income (expense), net, consists of changes in the fair value of our derivative liabilities related to our convertible promissory notes, the release of warrant and derivative liabilities related to notes payable, interest income and the amortization of investment premiums on our cash and cash equivalents and investments.

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 full valuation allowance against our U.S. deferred tax assets. 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.

 

 

16


Results of Operations

Comparison of the Three Months Ended March 31, 2016 and 2015

 

 

 

Three Months Ended

March 31,

 

 

$ Change

 

 

% Change

 

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

(In thousands except percentage)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

255

 

 

$

81

 

 

$

174

 

 

 

215

%

License

 

 

152

 

 

 

158

 

 

 

(6

)

 

 

(4

)%

Contract research and government grants

 

 

445

 

 

 

576

 

 

 

(131

)

 

 

(23

)%

Total revenues

 

 

852

 

 

 

815

 

 

 

37

 

 

 

5

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product revenues

 

 

147

 

 

 

56

 

 

 

91

 

 

 

163

%

Research and development

 

 

2,202

 

 

 

1,832

 

 

 

370

 

 

 

20

%

Selling, general and administrative

 

 

3,436

 

 

 

2,638

 

 

 

798

 

 

 

30

%

Total operating expenses

 

 

5,785

 

 

 

4,526

 

 

 

1,259

 

 

 

28

%

Loss from operations

 

 

(4,933

)

 

 

(3,711

)

 

 

1,222

 

 

 

33

%

Interest expense

 

 

(327

)

 

 

(467

)

 

 

(140

)

 

 

(30

)%

Other income (expense), net

 

 

76

 

 

 

(1,396

)

 

 

(1,472

)

 

 

(105

)%

Net loss before income taxes

 

 

(5,184

)

 

 

(5,574

)

 

 

(390

)

 

 

(7

)%

Income tax provision

 

 

(6

)

 

 

(229

)

 

 

(223

)

 

 

(97

)%

Net loss

 

 

(5,190

)

 

 

(5,803

)

 

 

(613

)

 

 

(11

)%

Accretion of redeemable convertible preferred stock to

   redemption value

 

 

 

 

 

(1,695

)

 

 

(1,695

)

 

 

(100

)%

Deemed dividends to warrant holder

 

 

 

 

 

(197

)

 

 

(197

)

 

 

(100

)%

Net loss attributable to common stockholders

 

$

(5,190

)

 

$

(7,695

)

 

$

(2,505

)

 

 

(33

)%

 

Revenues

Product revenues accounted for 30% and 10% of our total revenues in the three months ended March 31, 2016 and 2015, respectively. Our product revenues from sales of our Sonova products increased by $174,000, or 215%, due to continued increased growth in encapsulated sales and higher volume orders from several of our existing clients.

License revenues accounted for 18% and 19% of our total revenues for three months ended March 31, 2016 and 2015, respectively. Our license revenues decreased by $6,000, or 4%, in the three months ended March 31, 2016 compared to revenues in the same period of 2015. The decrease in license revenue is primarily driven by the discontinuance of license agreements during second quarter of 2015 resulting in revenue recognition for deferred fees.

Contract research and government grant revenues comprise a significant portion of our total revenues and accounted for 52% and 71% of our total revenues for the three months ended March 31, 2016 and 2015, respectively. Our contract research and government grant revenues decreased by $131,000, or 23%, in the three months ended March 31, 2016 compared to the same period in 2015. The decrease in grant and contract research revenue is primarily driven by two contracts achieving successful project completion within 2015. Contract research and government grant revenues can vary from quarter-to-quarter depending on the timing of contract research projects and the completion of services provided, and the timing of the award of government grants and eligible research and development expenses.

Cost of Product Revenues

Cost of product revenues increased by $91,000, or 163%, in the three months ended March 31, 2016 compared to the three months ended March 31, 2015 due to the increase in volume of sales when comparing the respective periods.

Research and Development

Research and development expenses increased by $370,000, or 20%, in the three months ended March 31, 2016 compared to the three months ended March 31, 2015. The increase was primarily driven by increased in-licensing fees, contract research fees recognized and increased field trial activity. These increases were partially offset by lower utilization of subcontractor work pertaining to grant contracts correlating with decreased contract research and government grant revenues.

17


Selling, General, and Administrative

Selling, general, and administrative expenses increased by $798,000, or 30%, in the three months ended March 31, 2016 compared to the three months ended March 31, 2015. The increase was primarily related to severance expenses, increased accounting, legal and outside services associated with operating as a public company, and a state franchise tax expense as a result of the Company’s reincorporation in March 2015.

Interest Expense

Interest expense was $327,000 for the three months ended March 31, 2016, a decrease of $140,000, or 30% compared to $467,000 for the three months ended March 31, 2015. The decrease was primarily related to the more favorable interest rate and smaller debt discount associated with the refinance of debt in December 2015.

Other Income (Expense), Net

Other income, net, of $76,000 for the three months ended March 31, 2016 was a decrease of $1.5 million, or 105%, in expenses when compared to a net expense of $1.4 million for the three months ended March 31, 2015. The decrease of $1.5 million in expenses primarily consisted of the release of derivative liabilities related to our convertible promissory notes, which balances were paid in December 2015.

Income Tax Benefit (Provision)

The income tax benefit increased by $223,000, or 97% for the three months ended March 31, 2016 when compared to the same period in 2015. The increase was the result of lower foreign tax expense expected for 2016 than recognized in 2015.

Accretion of Redeemable Convertible Preferred Stock to Redemption Value

Accretion of Series D redeemable convertible preferred stock to redemption value decreased by $1.7 million, or 100%, in 2016 compared to 2015. Our Series D redeemable convertible preferred stock converted into common stock upon the completion of our initial public offering in May 2015.

Deemed Dividend to Warrant Holder

In March 2015, the Company accounted for the amendment of a warrant related to the convertible promissory notes as a modification with the incremental increase in the fair value of $197,000.

Seasonality

We and our commercial partners operate in different geographies around the world and conduct field trials that are 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 variables on which sales of our products are dependent 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 in 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 and Capital Resources

Since our inception, we have funded our operations primarily with the net proceeds from placements of equity and debt securities, as well as proceeds from the sale of our Sonova products, payments under license agreements, contract research agreements, and government grants. Our principal use of cash is to fund our operations, which primarily are focused on progressing our agricultural yield and product quality seed traits through the regulatory process and to commercialization. This includes conducting replicated field trials, coordinating with our partners on their development programs, and collecting, analyzing, and submitting field trial data to regulatory authorities. As of March 31, 2016, we had cash and cash equivalents of $29.5 million, short-term investments of $20.7 million, and $14.9 million of long-term investments.

18


In May 2015, we completed our initial public offering. In connection with this offering, we issued and sold 8,528,306 shares of common stock at a price to the public of $8.00 per share and received $58.4 million in net proceeds, after deducting underwriting discounts and commissions of $4.8 million and offering expenses of $5.0 million.

In December 2015, we obtained debt financing in the form of a $25.0 million senior secured term loan, allowing us to prepay all existing debt with a more favorable terms.

We may seek to fund our operations through additional debt or equity financings, if necessary. We may also consider entering into additional partner arrangements or pursuing additional government grants. Our sale of additional equity could result in additional dilution to our stockholders. Our incurrence of additional debt would result in increased debt service obligations, and the instruments governing our debt could provide for additional operating and financing covenants that would restrict our operations. If we 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.

Term Note, Related Party

In July 2012, we entered into a 36-month unsecured term note with MCC, our largest stockholder, in the amount of $8.0 million. The interest rate on the loan was prime plus 2%, with interest paid monthly in arrears, and the principal was due in full at maturity in July 2015. In November 2014, we amended this note to change the maturity date to the first to occur of (i) April 1, 2016, (ii) the date of an event of default, or (iii) a date designated by MCC no earlier than the 20th day following our completion of an equity financing with gross proceeds to us of at least $50.0 million. In addition, the interest rate on the term loan remained at prime plus 2% through December 31, 2014, after which the rate increased to 11% per annum until maturity. This term note, including the principal balance of $8.0 million and accrued interest and prepayment fee of $148,000, was paid in full in April 2015. The $80,000 prepayment fee was recorded as a loss on extinguishment of debt.

Promissory Notes

We entered into promissory notes in August 2013 and November 2013 in the amounts of $2.0 million and $1.1 million, respectively. The interest rate on the notes was fixed at 10% with principal and interest due in 36 equal monthly installments over the course of the three-year terms. As described below under “Term Loans,” these notes, including the aggregate outstanding principal balance of $1.6 million and accrued interest and prepayment fees of $44,000, were paid in full in April 2015. The $37,000 prepayment fee was recorded as a loss on extinguishment of debt.

Convertible Promissory Notes

In September 2013, we entered into a note and warrant purchase agreement in the amount of $5.0 million with Mahyco International, an affiliate of Mahyco, one of our commercial partners with which we have several research and license agreements. We issued a convertible promissory note under this agreement in exchange for $0.5 million in September 2013 and issued a second convertible promissory note in exchange for $4.5 million in December 2013. The interest rate on the notes was prime plus 2%, compounded monthly over the course of the five-year terms ending in September and December 2018, respectively. At any time during the term, Mahyco International could convert all or part of the aggregate outstanding balance of the notes (including principal and accrued but unpaid interest) into shares of our common stock at $16.52 per share. Mahyco International had the right, at its option, to place another $5.0 million of convertible debt with us during the five-year term. Mahyco International, at its option, could offset future fee payments to us due from Mahyco under any license agreements or contract research and development agreements with us against the outstanding balance of the note, including principal and accrued but unpaid interest. With the exception of such offset payments, no principal or interest was due until the end of the term. Under this note and warrant purchase agreement, we also issued Mahyco International warrants to purchase 75,666 shares of our common stock at an exercise price of $16.52 per share. The warrants were issued in December 2013, vested immediately, and remain exercisable. The notes were paid in full in December 2015, as further described below in “Term Loans.”

Term Loans

In April 2015, we entered into a loan and security agreement with lenders that are affiliates of Tennenbaum Capital Partners, LLC. Obsidian Agency Services, Inc. acted as administrative agent for the lenders under this agreement. Under the agreement, the lenders committed to advance term loans in an aggregate principal amount of up to $20.0 million, and we borrowed the entire $20.0 million of term loan commitments on the loan closing date. A portion of the proceeds were used to repay the balance of the promissory notes.

19


In December 2015, we entered into a new loan and security agreement with Silicon Valley Bank (the “Bank”) providing for a senior secured term loan facility in the amount of $25.0 million. Proceeds were used to repay all existing debt, including the Tennenbaum term loans’ principal balance of $20.0 million and related accrued interest, prepayment and other fees in the amount of $1.3 million and the Mahyco convertible promissory notes’ principal balance of $3.7 million and associated accrued interest of $154,000. The Tennenbaum term loans’ prepayment and end of term fees of $1.2 million were recorded as a loss on extinguishment of debt, along with the $427,000 unamortized debt discount and $58,000 of deferred loan issuance fees. In addition, Mahyco’s option to place another $5.0 million of convertible debt was surrendered with the repayment and the related derivative liabilities totaling $1.6 million were released and recorded as a gain on extinguishment of debt.

Under this new loan and security agreement with the Bank, interest accrues at a floating annual rate equal to nine tenths of one percentage point (0.90%) above the prime rate published from time to time in The Wall Street Journal. The agreement requires us to make monthly interest-only payments through December 2017. After this date, we are required to make thirty-six (36) equal monthly installments of principal, plus accrued interest. Our final payment, due on the maturity date of December 1, 2020, shall include all outstanding principal and accrued and unpaid interest plus a final end of term payment equal to $600,000. Should the loan be repaid prior to the maturity date, the prepayment fee due is equal to 3% of the outstanding principal amount if prepayment occurs after December 29, 2016 but on or before December 29, 2017. If the prepayment occurs after December 29, 2017, the prepayment fee due is equal to 1% of the outstanding principal amount.

This loan and security agreement contains customary events of default and covenants, including a financial covenant that requires us to maintain either a liquidity ratio (defined as the ratio of our cash, cash equivalents and net accounts receivable to our obligation owed to the Bank) of at least 1.4:1.0, or to cash collateralize 100% of our obligations to the Bank. Our obligations to the Bank are secured by substantially all of our assets, excluding intellectual property.

Cash Flows

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

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Net cash (used in) provided by:

 

 

 

 

 

 

 

 

Operating activities

 

$

(4,855

)

 

$

(2,598

)

Investing activities

 

 

10,328

 

 

 

(7

)

Financing activities

 

 

94

 

 

 

(2,688

)

Net increase (decrease) in cash

 

$

5,567

 

 

$

(5,293

)

 

Cash used in operating activities

Cash used in operating activities for the three months ended March 31, 2016 was $4.9 million. Our net loss of $5.2 million and adjustments in our working capital accounts of $77,000 were partly offset by non-cash charges of $221,000 for stock-based compensation, $76,000 for net amortization of investment premiums and $67,000 for depreciation and amortization. The decrease in cash associated with our net operating assets of $77,000 was primarily due to a $793,000 increase in the change of prepaid expenses and other current assets as a result of a license fee and annual contracted research fees paid at the beginning of the year, which was offset by a $414,000 decrease in accounts payable and accrued liabilities due to the timing of our payments on billings received, $200,000 decrease in unearned revenue due to the recognition of revenue, and a $119,000 decrease in accounts receivable as a result of a significant milestone payment which was invoiced in the fourth quarter of 2015 and received in the first quarter of 2016.

Cash used in operating activities for the three months ended March 31, 2015 was $2.6 million. Our net loss of $5.8 million was partly offset by non-cash charges of $1.4 million for the change in fair value of derivative liabilities, $0.4 million for stock-based compensation, $0.1 million for accretion of debt discount, and $72,000 for depreciation and amortization as well as adjustments in our working capital accounts. The increase in cash associated with our net operating assets of $1.2 million was primarily due to a $1.1 million decrease in accounts receivable and unbilled revenue as a result of a significant milestone payment which was invoiced in the fourth quarter of 2014 and received in the first quarter of 2015.

Cash provided by (used in) investing activities

Cash provided investing activities for the three months ended March 31, 2016 of $10.3 million primarily consisted of maturities of short-term investments, partially offset by purchases of property and equipment.

20


Cash used in investing activities for the three months ended March 31, 2015 of $7,000 primarily consisted of the purchase of property and equipment.

Cash provided by (used in) financing activities

Cash provided by financing activities for the three months ended March 31, 2016 of $94,000 consisted of proceeds from the exercise of stock options and the purchase of ESPP shares.

Cash provided by financing activities for the three months ended March 31, 2015 of $2.7 million was related to $1.5 million of payments on notes payable and convertible promissory notes and $1.2 million of deferred offering costs payments.

Contractual Obligations and Other Commitments

There have been no other material changes in our contractual obligations since December 31, 2015.

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 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, inventories, income taxes, and stock based compensation.  There have been no material changes to our critical accounting policies and estimates during the three months ended March 31, 2016 from those disclosed in our Annual Report on Form 10-K filed with the SEC on March 8, 2016.

 

 

ITEM 3:

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary objective of our investment activities is to preserve our capital to fund our operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of cash equivalents and investments in a variety of securities of high credit quality. As of March 31, 2016, we had cash and cash equivalents of $29.5 million, short-term investments of $20.7 million and long-term investments of $14.9 million, consisting primarily of cash equivalents and other liquid investments deposited in highly rated financial institutions in the United States. A portion of our investments may be subject to interest rate risk and could fall in value if market interest rates increase. However, because the majority of our investments are short­term in duration, we believe that our exposure to interest rate risk is not significant and a 1% movement in market interest rates would not have a significant impact on the total value of our portfolio. We actively monitor changes in interest rates.

ITEM 4:

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Interim Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its

21


judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Interim Chief Executive Officer and Interim Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) identified in connection with the evaluation identified above that occurred during the quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

We currently are not a party to any material litigation or other material legal proceedings. From time to time, we may be subject to legal proceedings and claims in the ordinary course of business.

ITEM 1A.

RISK FACTORS

You should carefully consider the following risk factors, in addition to the other information contained in this report on Form 10-Q, including the section of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes. If any of the events described in the following risk factors and the risks described elsewhere in this report occurs, our business, operating results and financial condition could be seriously harmed. This report on Form 10-Q also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this report.

Risks Related to Our Business and Our Industry

We or our collaborators may not be successful in developing commercial products that incorporate our traits.

Our future growth depends on our ability to identify genes that will improve selected crop traits and license these genes to our collaborators to develop and commercialize seeds that contain the genes. Our long-term growth strategy is based on our expectation that revenues related to the sale of seeds containing our traits will comprise a significant portion of our future revenues. Pursuant to our collaboration agreements, we are entitled to share in the revenues from the sale of products that integrate our trait. We expect that it will take several years before the first seeds integrating our agricultural yield traits complete the development process and become commercially available for sale, resulting in revenues for us. However, the development process could take longer than we anticipate or could ultimately fail to succeed in commercialization for any of the following reasons:

 

·

our traits may not be successfully validated in one or more target crops;

 

·

our traits may not have the desired effect sought by our collaborators in the relevant crop or geography, or under certain environmental conditions;

 

·

relevant milestones under our agreements with collaborators may not be achieved; and

 

·

we or our collaborators may be unable to complete the regulatory process for the products containing our traits.

If products containing our traits are never commercialized, or are commercialized on a slower timeline than we anticipate, our ability to generate revenues and become profitable, as well as our long-term growth strategy, would be materially and adversely affected.

Even if we or our collaborators are successful in developing commercial products that incorporate our traits, such products may not achieve commercial success.

Our long-term growth strategy is dependent upon our or our collaborators’ ability to incorporate our traits into a wide range of crops with global scope. Even if we or our collaborators are able to develop commercial products that incorporate our traits, any such

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products may not achieve commercial success as quickly as we project, or at all, for one or more of the following reasons, among others:

 

·

products may fail to be effective in particular crops, geographies, or circumstances, limiting their commercialization potential;