This article is my fifth covering the very under-followed Arcadia Biosciences (RKDA), so for those new to the story, I recommend reading my earlier writings to get up to speed. In summary, my long-term bullish stance has been based on the company’s technological platform, one that I believe will use cutting-edge technologies to improve crops of many types.
As the company has evolved, there has been a new focus on vertically integrating within the Industrial Hemp space, a focus which should translate well to marijuana whenever it is fully legalized in the US. Since most of the company’s recent developments involve hemp, that’s where my focus will be today. However, to begin with, I think it’s worth reminding ourselves of the technology that RKDA employs in improving seeds and crops.
Core Technology
From the company’s website:
We use three technology platforms to improve crops, maximize productivity and mitigate environmental stresses, matching our approach to consumer preferences within a market:
- TILLING: Arcadia researchers compile plant populations optimized for high allelic diversity, creating seed and DNA libraries. These libraries can be mined to find new crop varieties with valuable characteristics- like GoodWheat™ high amylose wheat.
- CRISPR-Cas9: Arcadia scientists use CRISPR gene editing like a zipper inside a crop’s DNA to knock-out or knock-down gene function, resulting in an improved variety.
- TRANSGENICS: Historically, scientists in Arcadia’s California labs have used transgenic techniques to transfer genetic materials into key crop species, conferring new crop characteristics – like HB4 soybeans marketed through our joint venture Verdeca in Argentina, which are made drought tolerant by the insertion of a gene and promoter from sunflower
These core technologies can be used throughout the agricultural crop space, and RKDA is one of the few pure plays in the field.
Hemp
As I discuss throughout this article, RKDA seems to have placed an emphasis on its hemp offerings, so it’s worth taking a moment to review that crop and market.
AGMRC summarizes the growing basics:
Cultivated industrial hemp plants usually consist of a spindly main stalk covered with leaves. Considered a low-maintenance crop, hemp plants typically reach between 6 to 15 feet in height. Depending on the purpose, variety and climatic conditions, the period between planting and harvesting ranges from 70 to 140 days. One acre of hemp can yield an average of 700 pounds of grain, which in turn can be pressed into about 22 gallons of oil and 530 pounds of meal. The same acre will also produce an average of 5,300 pounds of straw, which can be transformed into approximately 1,300 pounds of fiber.
Industrial hemp may be an excellent rotation crop for traditional crops, because it suppresses weeds and decreases outbreaks of insect and disease problems. Hemp may also rebuild and condition soils by replacing organic matter and providing aeration through its extensive root system.
And here’s an excellent graphic explaining the makeup of the hemp plant:
(image source)
Note that the entire hemp plant can be processed for CBD, though the flower is much richer in CBD than are the other parts of the plant.
CBD Sales Forecast
The annual Hemp & CBD Industry Factbook gives the following estimate of annual CBD sales:
According to this estimate, 2020 sales will quintuple in just 4 years. This makes it a great market to pursue, albeit there are many other entrants with the same idea.
Biggest Issues with Growing Hemp
Since RKDA is in the business of solving crop-related problems or challenges, it’s worthwhile reviewing what industry experts consider those challenges to be. The Cannabis Business Times has an October 2019 article on just that question with the following excerpts being relevant to RKDA:
Difficulty obtaining certified feminized seeds and clones. Farmers looking for the highest revenue potential desire female hemp plants because CBD levels are highest in unpollinated female plants. Planting female clones ensures all female hemp plants, but the high cost and limited availability has restricted its use. With the shortage of certified feminized hemp seeds, farmers have purchased so-called feminized seeds without guarantees that they will be male-free or high in CBD content.
[…]
Risk of a “hot crop.” Industrial hemp crops can fail state agricultural department testing prior to harvest if test results show more than 0.3% THC by dry weight. The farmer is then required to destroy the crop.
Pollen drift issues and cross-pollination risks. CBD levels are highest in unpollinated female hemp flowers, while male hemp plants produce no flower. If male hemp plants, which are grown for fiber and grain, are planted too closely to female plants being grown for CBD, the male hemp plant can pollinate the female plants, leading to lower CBD yields as the plant expends energy for seed production rather than floral production. Similarly, the presence of male hemp plants can reduce the THC content of the female cannabis plant if pollination occurs.
RKDA’s Recent Developments Address These Challenges
I think using the lens of what farmers need is a valuable approach to understanding RKDA’s moves within the space. I try to tie the two together in this section.
1. Addressing the “Hot” Crop Issue
On December 10, 2019, RKDA launched its new product line named “GoodHemp” (which follows its naming of its wheat line GoodWheat). Front and center of that launch was the announcement that the company was now selling an ultra-low THC seed line. The value proposition is highlighted in the section I emphasized:
Accepting advance orders now, the first variety in GoodHemp’s catalog – Complia Bot+ – is a widely adapted cannabis strain that delivers high CBD content (more than 10 percent) with ultra-low tetrahydrocannabinol (THC), the psychoactive compound in cannabis. It is part of the Complia hemp seed line Arcadia is bringing to market through GoodHemp, with four additional proprietary varieties in early adopter farmer trials with sales expected in the 2020 season.
This innovation comes just months after the USDA’s Interim Final Ruling for hemp cultivation, which mandates that states test hemp crops and dispose of “hot” crops that exceed 0.3 percent THC. While hemp farmers will have access to crop protection options, the destruction of hot crops that fail these stringent inspections will not be a covered loss under crop insurance programs. In 2019 alone, approximately 20 percent of U.S. hemp crops were non-compliant, representing $2 billion in losses for growers.
On January 30, 2020, the company announced that the initial GoodHemp seed line has generated “over $3 million in pre-season seed purchase commitments.” For a nano-cap company like RKDA, this is a significant start.
2. Addressing Feminized Seeds
On June 10, 2020, RKDA announced the purchase of Oregon-based Industrial Seed Innovations.
ISI’s raison d’etre is to produce organically grown, high CBD feminized industrial seeds and seedlings.
RKDA further explained the acquisition as follows (with my emphasis):
“Industrial Seed Innovations brings tremendous talent, an impressive intellectual property and genetics portfolio and a solid and synergistic customer base to Arcadia,” said Matthew Plavan, Arcadia’s president and CEO. “This transaction will strengthen our hemp breeding and seed production capabilities, augment and leverage our proprietary ArcaTechTM discovery platform and further position us as a leader in delivering high-value, premium hemp seeds.”
According to the term sheet, ISI’s popular Rogue, Deschutes and Umpqua seed varieties will become part of Arcadia’s portfolio, alongside the company’s GoodHempTM line of genetically superior hemp seeds, transplants, flowers and extracts. The acquisition will significantly broaden and accelerate commercialization of Arcadia’s hemp-related breeding platform, as well as establish a breeding research and development facility in the Pacific Northwest, a key hemp production area. With ISI’s historically healthy gross margins, the acquisition is expected to be neutral to accretive to cash flow from operations in 2020 and meaningfully accretive to cash flows in 2021.
So with this purchase, RKDA is in a position to address two of the three most pressing challenges facing CBD-hemp growers.
Arcadia’s Vertical Integration
In March 2020, RKDA made two announcements related to its expansion of hemp sales and distribution. These add incrementally to RKDA’s vertical integration in the space:
March 19, 2020. Arcadia Biosciences Partners with Grow West® and Buttonwillow Warehouse Company to Bring GoodHemp Seeds to California Growers.
Under the terms of the agreement, Grow West and BWC will bring their collective grower relationships to Arcadia’s GoodHemp Innovation Partners platform – a select group of growers with exclusive access to Arcadia’s team of breeders, geneticists and computation biologists, as well as the company’s seed catalog of cutting-edge new hemp varieties.
“With more than 17,000 acres grown in the state last year, and even more planned for 2020, California is a key region for U.S. hemp production,” said Sarah Reiter, Arcadia’s chief commercial officer. “Through this strategic partnership with Grow West and Buttonwillow Warehouse Company, Arcadia gains access to every production acre in the state, including top California cultivators who rely on the crop and pest control advisors of these two companies to make important decisions throughout the growing season. Together, we’ll be working closely to ensure those growers understand and leverage the unique benefits of GoodHemp’s seed catalog.”
and
March 23, 2020. Arcadia Biosciences and Archipelago Ventures Announce Strategic Partnership with Vivion Specialties, Inc. to Certify and Distribute Hawaiian Hemp Products Across North America
“When it comes to hemp and hemp-derived products like cannabidiol (CBD), ingredient transparency and quality control are a high priority for discerning retailers and shoppers,” said Arcadia CEO Matthew Plavan. “With VivAssure, Vivion Specialties has pioneered a new and rigorous standard for the testing and certification of hemp ingredients. What’s more, Vivion is an experienced specialty ingredient supplier with a network of 18 sales regions in the U.S. and Canada, making them an ideal partner to distribute what we expect will be the first Hawaiian-grown, Hawaiian-extracted CBD ingredients available in North America,” he added.
Archipelago’s Hawaiian hemp products will be marketed as meeting VivAssure product quality standards, validating that they are free of over 950 pesticides and contaminants, 24 heavy metals and a variety of microbial organisms, and contain the precise tetrahydrocannabinol (THC) content and CBD profile listed.
With continued vertical integration, RKDA has a real possibility of emerging as an important player in the space, and given the projected growth rates in the hemp/CBD sector, ultimately this could be of great benefit to shareholders.
A Negative Development
The biggest worry with nano-caps and micro-cap companies is access to, and terms of, financing. This ugly truth bit RKDA recently when it not only agreed to reprice warrants (for which I have no issue given that it’s an easy way to raise money), but in the process also issued the same number of new warrants which are dilutive to current shareholders. Here are the particulars:
[RKDA] today announced the closing of a transaction resulting in gross cash proceeds to the company of approximately $6.8 million, through the exercise of certain existing warrants by several holders to purchase an aggregate of 1,392,345 shares of common stock shares at a reduced exercise price of $4.90 per share.
In consideration for the immediate exercise of the existing warrants for cash, the exercising holders received new unregistered warrants to purchase up to an aggregate of 1,392,345 shares of common stock at an exercise price of $4.775 per share with an exercise period of five years from the date of issuance.
The only positive I take from this is that it presumably allowed RKDA to proceed with the accretive ISI acquisition which I am very excited about.
Conclusion
If hemp/CBD continues to grow in the fashion it has been, then RKDA’s strategy is well-chosen to create critical mass in the sector and eventually either be awarded a premium valuation, or more likely in my opinion, be bought out by a larger player. Though I wasn’t happy about the recent financing, I continue to be supportive of RKDA’s strategy and am therefore still a shareholder with a long-term view.
Disclosure: I am/we are long RKDA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I actively trade around core positions.
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