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Arcadia Biosciences Rises on Wheat Hype
Underwater warrant holders are poised to sell shares
Just a month ago, Arcadia Biosciences, Inc. (RKDA 0.00%↑) was a penny stock in danger of delisting. But over the past three weeks, the stock has delivered a series of one-day gains as high as 31%. Today, it closed up 34% at $2.62 per share, its highest price since last July. What’s driving the rally?
Maybe investors believe the company will benefit from rising wheat prices caused by sanctions against Russia. Since 2018, Arcadia has sold a line of specialty wheat ingredients for use in consumer packaged goods. But wheat products still account for a small percentage of the company’s total revenue, which isn’t much. As of Sep. 30, Arcadia had earned just $4,609,000 of revenue in the first nine months of 2021, and more than half of that came from acquisitions.
In seven years as a publicly traded company, Arcadia has never reported an operating profit or positive cash flow except for a windfall it received in the fourth quarter of 2020 from the sale of its interest in a joint venture. Rather than generating cash, the company has survived on one dilutive stock offering after another. In the process, it has acquired a significant overhang of outstanding warrants with exercise prices above the stock’s current market price. The owners of the warrants aren’t the type to wait patiently.
Living hand to mouth
A registration statement that Arcadia filed in January reveals a long list of selling shareholders that specialize in financing needy micro-cap companies. And they’re just the ones that participated in Arcadia’s Dec. 2020 private placement. Since 2018, Arcadia has sold stock and warrants in eight offerings, often relying on a $50,000,000 shelf registration filed in May 2018. In two of the financings, investors agreed to exercise warrants they had acquired in prior offerings at reduced exercise prices in exchange for newly issued warrants with even lower exercise prices.
Just over four years ago, Arcadia effected a one-for-twenty reverse stock split, reducing its shares outstanding to 2,481,137. As of Dec. 31, 2021, shares outstanding had ballooned to 22,184,235. During the same four-year period, the company’s accumulated deficit swelled from $167,300,000 to $217,203,000, and the market price of its stock sunk from a high of $47.99 per share on Mar. 14, 2018 to a low of $0.78 per share on Jan. 28, 2022.
The warrants Arcadia sold during the past four years had exercise prices ranging from $3.00 to $45.75 per share. As of Dec. 31, 2021, Intracoastal Capital, LLC beneficially owned 1,058,559 shares of Arcadia issuable upon exercise of warrants. The market price of Arcadia’s stock would have to rise above $3.00 per share before Intracoastal could profit from selling any shares it acquired from exercising warrants (see table below).
At the end of last year, Hudson Bay Capital, LLC beneficially owned 890,049 shares of Arcadia issuable upon exercise of warrants. From Mar. 2018 through Jun. 2019, the hedge fund participated in Arcadia’s offerings of warrants with exercise prices ranging from $5.00 to $45.75 per share. Depending on when they were issued, the warrants expire five and a half years after the issuance date or the initial exercise date.
The holders of Arcadia’s warrants have an incentive to bid up the company’s stock price to an amount that will allow them to exercise and sell profitably. We are not suggesting that any of them are manipulating prices or violating securities laws. Regardless, if they begin exercising warrants and liquidating newly issued shares, the sales will put downward pressure on Arcadia’s stock price. That’s why we believe the stock won’t maintain the loftiest prices it reaches in the current rally.
As of Sep. 30, 2021, Arcadia had $35,526,000 in cash. But the company used $19,208,000 to fund its operations in the first nine months of last year. At that rate, the company is likely to raise capital again within the next four quarters. Moreover, the company’s 2018 shelf registration has approximately $11,000,000 of remaining capacity, which could allow Arcadia to issue shares available for immediate resale, further diluting shareholders.