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In 2009 Abbott Laboratories (ABT) bought out Advanced Medical Optics for $22. AMO was trading at $8.85 before the announcement. This deal represented an acquisition premium of over 200%.

If you were presented with a company that had an extremely high possibility of being bought out in the not too distant future giving you a spectacular return, would you take the time to examine it?

If you would, this article is for you.

The Dilemma

Tilling the soil is an agricultural practice that has been done since time immemorial. Like many detrimental practices that have been carried down through the ages (government, welfare and warfare) it is not necessary, yet it is still conducted.

Why is tilling detrimental?

• Tilling the soil removes any cover crop that is preventing the erosion of the top-soil by wind and water.
• Tillage results in a down slope movement of soil (nutrient rich topsoil sinks further down being replaced by non nutrient rich sub layers).
• Tillage moves soil to depressions/gully’s where it is washed away.
• Tillage pulverizes the clumps of soil (aggregates) exposing the soil to eroding forces.

You’re probably well aware of the agricultural challenges facing the world today. To feed the world's growing population, we need to grow more food in the next 50 years than has been grown in the last 10,000 years combined.

When you consider that approximately 40% of the world's agricultural land is seriously degraded, this makes for a monumental task.

When plants don’t have the nutrients they require, they simply don’t grow. Crop yields decline, nutritional content is reduced and food quality is affected.

What are the implications?

Farmers simply cannot sell crops that are not visually appealing and nutritious, thus they must rely on the use of fertilizers to ensure the nutrient content of soil is maintained.

Fertilizer is often the greatest input cost for a farming operation. Increasing nutrient loss through topsoil erosion results in the need for increasing quantities of fertilizer to be applied to achieve the desired yields.

The soil has a fertilizer saturation point that, when reached, results in no additional crop yield. A poor quality soil full of fertilizer will not yield the same quantity and grade of crop as an excellent soil with appropriate fertilizer application.

The loss of topsoil is one of the biggest problems that farmers and farming companies face. As more and more farmers sell their farms to big companies, there will be a huge emphasis on cost cutting to preserve profit margins.

The current generation of agricultural equipment is advanced…isn’t it?

The air seeders that are used in commercial agricultural production are based on technology that was developed 30 years ago.

Where there is a dilemma, there is an opportunity to profit by presenting a solution.

The Solution

Farmers are notorious for doing things how they’ve always been done. They’re also notorious for being penny-pinchers, and that's a good thing because you don’t get rich writing checks. However, agriculture is now at a collision point between these two ideas: On one side, an aversion to change; on the other, a need to modernize to save money, time and increase productivity.

The big farming companies that will lead the way within the agricultural space are of the new generation. They understand what a bottom line is and they’re constantly looking for new technologies that will enable them to produce more with less.

A solution to the problems that are faced by today’s farmers has been developed and is just about to go into production.

The Company – Clean Seed Capital 

 

 

History

The company was incorporated on January 28, 2010.  In 2011 Clean Seed Capital burst onto the public stage after a successful IPO. The IPO consisted of 6,700,000 common shares at a price of $0.30. The proceeds from the IPO were used to purchase Vesco’s Terra-Glide technology, a patented non-tillage agricultural precision planting system.

The People

The most important factor in determining the success of a company will be the ability of a management team to get the job done. Testaments to the efforts of Clean Seeds team have come in the form of multiple awards including the 2014 New Equipment Innovations Award.

Lets have a look at the team:

Graeme Lempriere President/CEO

• Over 20 years’ of experience in company restructuring, marketing and corporate finance.
• Secured worldwide exclusive rights to Clean Seed’s unique patented seeding technology.
• Since going public in 2011 has led Clean Seed Capital to a TSX Venture 50 Company.

Colin Rosengren VP, Agronomic Protocols & Practices

• Third generation Canadian large scale commercial farmer.
• Specializes in Zero-Tillage and Intercropping Techniques.
• Instrumental in the development of the CX-6 SMART Seeder.

Noel Lempriere VP, Marketing

• Over 18 years’ of experience in marketing and personnel/project management.
• Marketing and distribution to commercial projects across Western Canada and the US.
• Advisory Board member for the 2010 World Masters Athletics Championships.
• Has worked directly with CEO and the Clean Seed Technology since its inception.

Steven Brassard Chief Financial Officer

• Chartered Accountant with a Master Degree in Professional Accounting.
• Accounting and financial consulting services to public and private enterprises.
• International Financial Reporting Standards Consulting to public companies.

Colin Rush Independent Director & Senior Advisor

• Senior business sales and operations leader with over 17 years of experience.
• Current Canadian Region Head of JCB.
• Senior sales and operations positions with John Deere and Case IH.

The management has directly relevant experience within the agricultural industry. Graeme worked with his father in the development of the technology from inception and he purchased the rights from his father when he was taken ill. Graeme has achieved no small feat in leading Clean Seed to a TSX Venture 50 company. This sort of achievement is is what I like to see on the resumes of management.

Current Technology – 30 Years Old

The technology that is used in modern seeders was developed decades ago and has many shortcomings. They include:

• Seed is stored in a bin that is up to 80 feet in delivery line from the drill.
• High speed air is used to blast the seed from the bin to the drill causing poor accuracy, degraded precision and damage to the seed.
• Metering is done at the bin so an accurate resolution cannot be achieved.
• Overlap can be as high as 15%.
• Refilling the bin involves semi-trailers and conveyors, time consuming and costly.
• Multiple products cannot be delivered simultaneously.
• No wireless transmission of data.
• No data logging of exact gps coordinates for specific products.

Clean Seed's Technology

Dr. Noel Lempriere (father of the current CEO, Graeme Lempriere) invented the Terra-Glide planting system. He was responsible for researching, developing and testing the technology over a period of 10 years. He also successfully secured patents on the technology.

The Terra-Glide technology was designed for the commercial planting of seeds in a way that minimizes the tilling (disturbing) of the soil.

The engineers who designed Clean Seed's flagship seeder, the CX-6 came out of the auto industry. This is extremely important because they were able to look at the issues that the current generation of seeders caused, analyze them from an outsiders perspective with none of the industry bias, then formulate the solutions to the issues.

The major seeding equipment producers are still looking at product development from an improvement perspective as opposed to the complete reinvention perspective that Clean Seed took, thus creating the opportunity for the development and patent of the revolutionary technology in the CX-6.

No till seeding with the CX-6 Source: Clean Seed Capital

So what separates the CX-6 from the 30 year old current generation of seeders?

• Seed stored in individual canisters 1.5 feet from the gravity delivery mechanism that treats the seed gently eliminating bunching and seed stress.
• Seed metered from each and every row so an infinite resolution can be achieved, eliminating overlap and miscounting.
• Delivery motors move independently so when turning corners, product is uniformly distributed.
• Each unit contains a pod. In each pod there are 6 canisters than can contain a separate product enabling the ability to deliver up to 6 different types of product per foot of the 60 foot seeder without unloading the seeder and replacing the seed.
• Complete data logging enabling the review of every foot of the field to see the distribution of each individual product.
• Wireless connectivity and management from the cab.
• On the go refilling.
• Modular construction – easy to replace individual canisters and pods.

Another feature that the CX-6 has over its competitors is the fill on the go system. For the current 30 year old seeder technology, to change a product or refill the seeder would require semi-trailers of seed and a conveyor to load the seed into the seeder.

Clean Seed has developed a refill system in the form of refill shuttle carts. The way they operate is when a farmer maps his field he will know where he will run out of seed. He then places a shuttle cart in that area of the field. The shuttle cart is an exact mirror of the primary cart.

As the farmer comes up alongside the shuttle cart, he stops the drill, hitches up to the back of the tool bar and then can continue to seed as a pneumatic transfer system carries the product from the shuttle cart to the primary cart on the go. The shuttle cart can then be dropped, picked up and replaced allowing continuous seeding and eliminating the expensive logistics of refilling via semi-trailer and conveyor.

If you have a big farm you purchase multiple shuttle carts and seed from cart to cart. The carts are also multi-directional so you can unload seed from the primary cart into a shuttle cart to take it back to the farm from the field.

Illustration of the shuttle cart (source: Clean Seed Capital)

All of these elements fall under the 17 patents that Clean Seed has filed for the technology making the company very uniquely placed to capture massive market share.

What does all this mean to the farmer?

Reduced:

• Seed fertilizer input costs.
• Fuel costs per planting.
• In field operator time.
• Environmental impact.

Increased:

• Profits and margins.
• Yields.
• Overlap protection.
• Precise application.

Illustration of individual zone mapping (source: Clean Seed Capital)

Balance Sheet and Finances (December 31st 2014)

Cash and cash equivalents: $988,625 (approximately $600,000 currently)

Cash Burn: $100,000 a month.

Total assets: $6,671,481

Total Liabilities: $600,336 (includes a note payable of $299,389 to Noel Lempriere for the purchase of the technology).

The note payable to Noel will be paid off with the proceeds of the placement and going forward the company does not forsee any further need for raising funds in the market.

As I’m writing this article, Clean Seed may be (if they’re not, they will be soon) in the middle of a private placement for the last tranche of capital they need to bring the first CX-6 seeders into production.

The company is being proactive with the financing. By this I mean they are looking for financing partners who are going to take a long term interest in the company, someone who will be active in the after-market shares, not just an investment house with a hand out presenting predatory terms.

So far they have been supported by the IPO and some private placements within the farming community and they will not have a problem getting the finance. They do however identify the need to expand the shareholder base outside of the farming community, bringing more exposure to the company.

They are looking at roughly a $3.5 million raise. It’s important to note that the last financing was at 60 cents and now those investors want to come back to the table, so the company is in the fortunate position of being able to dictate terms of the financing.

Share Structure

Very tight, what I like to see. The company has been very mindful of dilution and has managed to raise capital at a good price in the market.

• Shares outstanding: 35,514,166
• Broker warrants: Note 1 – 73,680 @$0.45
• Broker warrants: Note 2 – 143,780 @$0.60
• Warrants: Note 1 – 877,500 @$0.45
• Warrants: Note 2 – 3,294,000 @$0.45
• Warrants: Note 3 – 2,500,000 @$0.85/$1.25
• Fully Diluted: 45,828,126 

Ownership

The company has a very high level of insider ownership with many of the insiders being farmers themselves. They have participated in the private placements and many of them will be placing initial orders for the first delivery in 2016.

• Insiders: 40%
• Farmers: 40%

The company is looking to bring on a finance partner from outside the agricultural space to diversify the investor holdings of the company and provide it with additional coverage within the investment community.

Profit Margin

The gross margin is around 40% with the seeders being competitively priced from $500,000 up to $650,000. Equipment turnover within the agricultural sector is around every 5 years. This creates a potential market of $1.7 Billion dollars. There are currently 14,000 air seeders on the great north west area between the United States and Canada and none of them provide the resolution and monitoring functions that the CX-6 provides.

Clean Seed has the opportunity to grab massive market share with their CX-6, however they’re not aiming to become the next John Deere. The company is realistic about creating shareholder value and they know where the low hanging fruit lies. I’ll cover off on this shortly.

Production

On the 23rd of April 2015, the company released news that they had finalized an agreement with WS Steel to manufacture the CX-6 Smart Seeder. The current arrangement is for WS Steel to manufacture 100 CX-6’s over the next 3 years. WS Steel is investing significant capital into its own facilities in preparation for the manufacturing of the units.

WS Steel has a 25 year history of producing equipment for the agricultural sector so this is a massive step forward for the company.

(Source: Clean Seed Capital)

Distribution

On the 28th of January 2015, the company announced a distribution agreement with Rocky Mountain Dealerships. Rocky is one of Canada’s largest agriculture and construction dealership networks. The agreement is for a renewable period of 3 years beginning in 2016 and Rocky will manage exclusive sales territories with agreed upon sales commitments.

On the 8th of April 2015, Clean Seed announced that they had entered into a distribution agreement with Cervus Equipment Corp. Cervus has interests in 75 dealerships throughout Canada, New Zealand and Australia. Cervus also represents John Deere, Bobcat and JCB equipment. The agreement is for a renewable period of 3 years starting in 2016 and will be managed with agreed-upon sales commitments.

Having both the production and distribution agreements finalized has de-risked the company to a major extent. Now I will touch on the strategy of the company that will add value for shareholders.

Strategy

Management is cognoscente of the fact that growth in the agricultural industry is driven by acquisition. They have strategically placed themselves through the acquisition of patented equipment, in a very attractive position. The majors (John Deere, Case International, New Holland) know their technology is out of date and there is only so much they can to do improve it. To survive and compete in this industry, the majors have to either develop or acquire the new technology that farmers want.

The revolutionary equipment that Clean Seed has brought to the market is literally like what fuel injection was to carburettors. The technology is a game changer, the next step in the evolution of farming.

Illustration of the CX-6 seeding different mapping zones (Source: Clean Seed Capital)

Clean Seed’s strategy is to create shareholder value by being bought out, it’s that simple. The attention that the CX-6 has garnered in the press from its attainment of numerous awards has not gone unnoticed. The majors are circling this company and in all likelihood, discussions are already underway.

The final step in the execution of the buyout strategy is the confirmation from the market in the form of sales contracts, showing that people want to buy the CX-6 Seeder.

My initial hypothesis is that farmers recognize that this technology is the future of farming. The evidence to back my hypothesis is the fact the company raised $1.3 million in 3 days from the farming community in a private placement. Further evidence can be seen by examining the videos on youtube where the CX-6 is exhibited at farming trade shows. Take careful note of the reactions by farmers.

When the sales of the CX-6 are announced and the positive market sentiment towards the revolutionary technology is affirmed, the majors will have the confirmation they need to pounce on Clean Seed.

Over the coming months, the sales contracts will begin to materialize as farmers traditionally put down 50% of the purchase price to order, then the remaining 50% on delivery. There will be extensive demonstrations of the CX-6 throughout the dealerships and the news will spread quickly amongst the farming community that there is a new technology that far exceeds the reliability, cost and results of anything that is currently on the market.

Competition

There are countless companies that manufacture seeding equipment but due to the patented technology, Clean Seed is alone at the front of the pack. Buying a new seeder is no different to buying a new car or a new TV. Farmers want to purchase the newest and best technology at a reasonable price.

The CX-6 is priced very competitively and the savings that farmers will incur from it’s utilization gives the CX-6 a distinct advantage over its competition. There is no alternative product on the market that provides what the CX-6 does.

Margin of Safety

The company is currently trading reasonably close to it’s 52 week low, something I love to see. When a company is trading at a 50% discount to where it was a little over a year ago and it has secured production and distribution agreements, essentially de-risking the operation, that is a beautiful occasion. The margin of safety for this company is very high and I see limited downside from this current price level. If the price of the stock were to fall even further on no news, I may consider auctioning off a kidney to buy more stock.

(Source: Google Finance)

Risks

No company is risk free so it is important to note what could go wrong. Let’s examine the possibilities:

• Company can’t obtain the last tranche of financing (highly unlikely – company is in a position to pick and choose financiers)
• Production delays (unlikely – WS Steel has a 25 year track record of exceptional machinery manufacturing performance)
• Equipment faults during testing (unlikely – significant testing has already been undertaken and any issues are likely to be easily resolved due to the expertise of the engineering team)
• Cannot secure sales contracts (highly unlikely – considerable interest has already been shown by the farming community)
• Government making life hard (highly unlikely – government very supportive and the company is receiving a government grant that pays for some of the tech staff)
• Majors are not interested in the company (unlikely – they need the newest equipment to stay competitive and they value the monopoly that the 20 year patented technology provides)

Value Proposition

Placing a value on the company in its current position is hard as the only objective measure would be a comparable sale. I have no such figures to rely upon so I can’t make the comparison. I will however state that I believe the liquidation value of the company is north of $2 a share with the current portfolio of patents being the justifying factor.

I will be very surprised if Clean Seed’s market cap (currently $14.4 million) doesn’t exceed $100 million by the time it’s acquired. The potential for a bidding war over this technology is very high.

Summary

Clean Seed’s CX-6 Smart Seeder is like the I-Phone of the agricultural sector. The technology is revolutionary, patented and will be looked back on as a pivotal point in the evolution of agricultural equipment. The opportunity to gain a substantial return on investment within a relatively short time period makes Clean Seed Capital Corp an excellent investment for the educated speculator.

• Strong management with directly applicable experience in farming and agriculture.
• Patented technology with a 20 year monopoly.
• Attractive 40% profit margin on the CX-6 Seeder.
• Tight share structure – Fully Diluted: 45,828,126
• 2 issued patents – opener technology and metering.
• 17 patent claims pending for the CX-6 Smart Seeder – world wide WIPO.
• Manufacturing agreement.
• 2 distribution agreements.
• Huge inside ownership – 40%
• Revolutionary technology.
• Family has $3 million invested.

Clean Seed is at the forefront of the agricultural revolution. The company presents an attractive investment thesis with the management, product and market to back it up.