Origin Agritech Limited (NASDAQ:SEED) filed its 20F after the close last Friday. We are obviously not pleased with the company’s propensity to overpromise and underdeliver. However, a lot of this has to do with the government delaying the GMO positive process that appeared to be a goal that should have been met by the end of 2021, according to information published on various sources in China.
Nonetheless, we still think that Dr. Gengchen Han, the chairman and founder of the company, needs to step up to the plate and buy stock in the open market to help instill investor confidence in the company’s future. Furthermore, it’s been 1 month since the company talked about it’s deal with Chinese food producer BaoDao Feed to produce and sell specialized corn crops, adding that it would be providing guidance with regards to this relationship. Hopefully, now that the company has filed its 20F, it can issue guidance. But it’s just another example of the company putting the cart before the horse, leaving investors dangling in the air.
Hopefully, moving on to something more positive, we were curious if there was any information in the 2021 20F filing that was not present in last year‘s 20F. Here’s what we found so far:
Status of Joint venture
In October 2020 , the company entered into a joint venture arrangement with a state owned enterprise in China, Beijing Changping Technology Innodevelop Group (BC – TID), that is intended to help the company commercialize its GMO initiatives when China goes GMO positive. Although the company received $23.4 million from BC – TID, this amount is being treated as a debt obligation on SEED’s balance sheet. However, the original agreement did state that, upon the official approval and closing of the JV, BC-TID would eventually convert this debt into equity.
Well, it’s been over a year since the company stated that this event would occur. And the company never explained what was causing a delay in the debt to equity exchange. However, the 2021 20F goes into detail about what happened and mentions that the JV approval process may be in the final innings, putting the debt to equity conversion back in play. This should greatly improve SEED’s balance sheet.
“However, the process has taken longer than originally expected mainly due to the complicated tax related issues with Beijing Origin’s headquarters building and the government approval process. As ofJanuary 16, 2022, BC-TID has injected into Beijing Origin a total of RMB137.7million ($20.2million) as a loan to Beijing Origin based on the agreement. Currently, the agreement is being finally approved by the government officials. The cash amount received by Beijing Origin was used to repay the bank loan collateralized by the headquarters building and provide working capital. According to the agreement, RMB137.7 million cash currently booked as a current portion of long-term debt, due in April, 2022, is an interest-free loan and will be converted to the equity for the joint venture when the JVis formed. Also according to the agreement, the Company leases the headquarters building to BC-TID.”
Revenue opportunities and liquidity
The 20F also talks about initiatives the company is pursuing to generate revenue and cash, such as entering into licensing arrangements with other companies to use SEED’s IP. Hopefully, the company will give us some clarity on where they are in regards to these goals. But this should be an interesting positive addition to the story because licensing revenue would probably flow right to the bottom line.
“There are newhybrids completed variety trials and will be in the market this season. Furthermore nutrition enhanced corn will be produced for animal feed which will greatly increase the revenue. Besides the aforementioned cash inflows, the Company is also seeking funds from other resources including but not limited to licensing its core seed traits to its customers, applying for more government grants for research and development activities, pursuing other capital investment from investors and selling certain company assets. The Company consistently reviews its working capital requirements.”
If there is a silver lining to the SEED saga, it’s that the bullish thesis seems no longer solely dependent on China going GMO positive. If some of the things in SEED’s pot, including its new gene editing endeavors , come to fruition, GMO positive may just be the “cream on top.”
Obviously, the company still faces potential liquidity issues until it starts to generate revenue. We are crossing our fingers that any liquidity issues the company is facing will be alleviated through the arrangement it reached with BaoDao Feed on January 4, 2021. Combine that with the closing of what appears to be the imminent approval of the joint venture and the revenue opportunities currently on the table, and we can begin to get more optimistic.
Although it’s a risk, we don’t think the company will raise equity capital at anywhere near the current stock price.