RKDA: Arcadia Biosciences confirms hemp seed order backlog of over $3 million and reiterates guidance of $10+ million in total revenues for 2020

By Steven Ralston, CFA

NASDAQ:RKDA

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Arcadia Biosciences RKDA is on the cusp of significant revenue growth, primarily from management's initiative into the hemp space. Since launching the effort in February 2019, Arcadia is expected to generate revenues in excess of $8 million from the hemp business alone. Almost additional $2 million is anticipated to be generated by the company's promising GoodWheat franchise and legacy SONOVA GLA product line. Management's recently reiterated guidance of $10 million in revenues, which would represent record revenues for the company, compares to less than $1.2 million in total revenues in 2019.

Arcadia Biosciences is an innovative, agricultural biotechnology company with a broad and growing agricultural product portfolio focused predominately on improving crop traits and nutritional value. Targeted traits include improvements that optimize nutritional and wellness value (like increased fiber and reduced allergenicity), particularly for wheat and soybeans, as well as an optimized cannabinoid profile for hemp. The company develops seeds for crops, with the current focus on hemp, wheat and soybeans under the trademarked names of GoodHemp™, GoodWheat™ and Verdeca HB4® soybeans, respectively. Arcadia Biosciences owns or exclusively controls 153 issued patents and 63 pending patent applications worldwide across 30 patent families.

Furthermore, the HB4 soybean franchise offers a blue sky opportunity if/when China grants an import license for HB4 soybeans grown in South America (primarily Argentina, Brazil, Paraguay and Uruguay).

In 2017, management began transitioning the company from a predominantly agricultural research and licensing company (which targeted revenue from government grants and research contracts) to branded, agricultural ingredient company that is striving to capture a position in the higher margin, branded, plant-based ingredients business that targets markets higher in the value chain where consumers are willing to pay premium prices, namely in the nutritional, food & beverage, cosmetics, personal care and pet nutrition industries. These markets target the burgeoning growth in demand for differentiated health & wellness products, such as healthy high-fiber food options, specialty low gluten choices and quality CBD products.

The foundation for developing a portfolio of quality ingredients for the consumer market is the company's core competencies in plant genomics and ArcaTech platform. Arcadia has a robust and growing library of unique and high-value traits for multiple crops, including wheat and soybeans. Even though the company's first commercial hemp product, GoodHemp™ (an ultra-low THC, disease resistant hemp seed) debuted within 11 months. Arcadia's expertise and technologies allow for rapid development and commercialization of novel traits. The company's advanced gene-editing and breeding capabilities provide significant advantages in terms of both developing quality value-added agricultural products and accelerating the commercialization timetable.

As part of the transition strategy, management has placed enormous importance on the commercialization process. Through joint ventures, partnerships and collaborations, management has accelerated the speed at which the company's go-to-market strategy can be implemented.

In Hawaiian hemp, the joint venture with Legacy Ventures Hawaii fast-tracked the 50 acres of hemp cultivation and is advancing the construction of an extraction and processing facility. A partnership with Vivion Specialties is expected to generate sales of Arcadia's Hawaiian-grown, hemp-extract CBD products later in 2020. In California hemp, partnerships with Grow West and Buttonwillow Warehouse Company are anticipated to jump-start sales of the GoodHemp seed line.

A plethora of distribution channels are in place for the HB4 Soy line in South America. Through Verdeca, a joint venture with Bioceres Crop Solutions, licenses for varieties of HB4 soybeans have been allotted to Bioceres Semillas SA in Argentina, Semillas Agronegocios del Plata in Uruguay and Tropical Melhoramento e Genética Ltda. (TMG) in Brazil.

GoodHemp™

Interest in and demand for CBD has exploded since passage of the U.S. Agriculture Improvement Act of 2018, which went into effect on January 1, 2019. Removing hemp from regulation under the Controlled Substance Act has spawned a hemp CBD product industry that is estimated to generate annual revenues of over $20 billion in the U.S. by 2025. The under-researched hemp space is ripe for genetic innovation.

Arcadia has established a 50-acre hemp and hemp seed cultivation footprint in Molokai, Hawaii as well as 10-acre hemp research facilities in California and, through a partner, in Oregon. Within 10 months, Arcadia introduced a GoodHemp seed that produces a disease resistant plant with ultra-low levels of tetrahydrocannabinol (THC). A backlog of $3 million is expected to be ordered and shipped during the second through fourth quarters, and Hawaiian CBD products are expected to come online in the third quarter.

GoodWheat™

Arcadia's GoodWheat portfolio also has a high-fiber variety with up to 10 times the dietary fiber of traditional wheat. In 2019, the company announced that GoodWheat will come to the North American market exclusively through Bay State Milling Company under the rollout of a high fiber wheat bread under Bay State's HealthSense brand. As a sign of Bay State's commitment, in February 2020, Bay State Milling announced the construction of a new 1 million bushel grain storage elevator, which will support the go-to-market plan for the product launch. In the second quarter of 2020, initial GoodWheat revenue should be recorded from shipments to Europe.

HB4® soybeans

Arcadia's Verdeca HB4 drought tolerant soybeans are expected to launch into commercial production in Argentina about a year after China allows for its import. In the meantime, increasing numbers of farmers are registering for field trials. The most recent HB4 pre-commercial soybean crop (slated for harvesting in May 2020) was planted on roughly 2,800 hectares in order to build an inventory of seed for the next cycle. The magnitude of the next crop cycle is expected to be as much as 40,000 hectares based a 1,000% increase in sign-ups for acreage at Argentina's Expoagro held in March 2020.

Management Guidance

In late January 2020, management provided revenue guidance for 2020 of $10 million, which is expected to be primarily driven by the purchases of the recently introduce GoodHemp product line. The guidance was re-confirmed on the May 13th first quarter conference call, after taking into account the effects of COVID-19 pandemic.

Recent Developments - GoodWheat

Arcadia Biosciences continues to enhance the company's wheat platform through additional patents and Notices of Allowances granted by the U.S. Patent and Trademark Office.  

In late February 2020, the company was awarded a patent for a non-genetically modified (non-GM) yield-improving allele that improves yield in high fiber, resistant starch wheat. Multi-year field studies with breeding lines carrying the higher-yielding allele produced an average of 6% to 9% higher yields. The field trials also indicated that the same wheat allele produced a 25% higher yield when the wheat plots were damaged by frost at a sensitive heading stage. The innovation was developed through ArcaTech.

In May 2020, Arcadia Biosciences was granted two patents for extending the shelf life of the company's GoodWheat wheat varieties of extended shelf life and reduced gluten by minimizing hydrolytic and oxidative rancidity (U.S. Patent 10,463,051 and 10,457,951). Also, Arcadia received notices of allowance for two additional patents that extend earlier claims on extended shelf life and reduced gluten wheat GoodWheat product lines. Arcadia's patented trait technology improves the shelf life and taste of whole wheat flour by slowing enzymatic processes that cause bitterness as it ages. By this means, the storage life of whole wheat flour made with GoodWheat is extended to more than 10 months versus 10 to 30 days for standard whole wheat flour.

Recent Developments - GoodHemp

On January 30, 2020, Arcadia Biosciences announced that over $3 million in initial seed purchase commitments of GoodHemp had been secured for the 2020 spring plantings since the branded product's debut at the American Seed Trade Association CSS & Seed Expo in mid-December. The $3 million in seed purchases was re-confirmed on the May 13th first quarter conference call. Revenues from these initial purchase commitments should be recognized when the seeds are delivered to growers, which management anticipates being no later than the fourth quarter of 2020.

In January 2020, Arcadia established the GoodHemp Innovation Partners platform, a group of select growers who will collaborate with Arcadia's agronomists (breeders, geneticists and computational biologists) in order to advance more quickly and more robustly the understanding and opportunities of GoodHemp seed. Structured as a hub model, regional centers are currently located in Hawaii, the Pacific Northwest (Portland), Southern California, Florida, and near the company's headquarters in Davis California. Other centers are planned for the Desert Southwest, Mountain West and Mid-West.

On March 19, 2020 Arcadia Biosciences announced strategic partnerships with two California companies (Grow West and Buttonwillow Warehouse Company) in order to better and more quickly introduce GoodHemp seeds to hemp growers in California. The grower relationships of these two companies will afford synergies to the process of the GoodHemp Innovation Partners platform and help introduce the GoodHemp seed line to California growers. Grow West is a large independent supplier of agricultural products with 18 retail, farm supply and wholesale manufacturing facilities located primarily in Northern California while Buttonwillow is a family-owned and operated distributor of fertilizer and crop protection products that serves Central and Southern California.

In March 2020, Arcadia signed an agreement with Vivion Specialties to manage the state-side marketing and sales of Arcadia's Hawaiian-grown hemp-extract CBD products. Along with exclusively distributing Arcadia's Hawaiian-grown THC free distillate and CBD isolate to North American food, beverage, nutrition, personal care and pet markets, Vivion will certify the products under their branded VivAssure™ ingredient process.

Recent Developments - HB4®

In November 2019, regulatory approval of the HB4 trait was granted by Paraguay, expanding the number of countries that have approved the sale HB4 drought-tolerant and herbicide-resistant soybeans.

In March of the last two years (2019 and 2020), Verdeca has showcased HB4 drought tolerant soybeans at Expoagro, Argentina's largest farm show, which is attended by over 150,000 attendees. During the exposition, Verdeca recruits South American growers to adopt HB4 soybean varieties for the upcoming growing season.

The most recent HB4 pre-commercial soybean crop (slated for harvesting in May 2020) was planted on roughly 2,800 hectares (6,900 acres) to build an inventory of seed for the next cycle. The magnitude of the next crop cycle is expected to be between 20,000 and 60,000 hectares (50,000 – 150,000 acres), depending grower appetite for HB4 technology.

Arcadia Biosciences is an innovative agricultural biotechnology company with a broad and growing agricultural product portfolio focused predominately on improving crop traits and nutritional value. Management's current focus is on hemp, wheat and soybeans under the trademarked names of GoodHemp, GoodWheat and Verdeca HB4. GoodHemp is anticipated to generate record revenues for the company in 2020, while GoodWheat is being rolled out in the North American market. Moreover, the HB4 soybean franchise is teed up to offer a blue sky opportunity if/when China grants an import license.

Valuation

For Arcadia Biosciences, a reasonable methodology is a discounted cash flow (DCF) model that estimates future cash flows and discounts them by using the cost of capital in order to attain a net present value. Arcadia's revenues for 2020 are being estimated using management's guidance while revenues in the out-years are being projected by industry forecasts and our estimates of the company's market share. The model is arranged by products lines, namely GoodHemp, GoodWheat, HB4 soybeans and SONOVA GLA. Our DCF model (which applies a 12.5% discount rate and a terminal P/S ratio of only 0.33) indicates a NAV share price target of $12.00 per share on a fully diluted basis.

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