By Henry Kawabe
Stevia products popularity continue to soar as hungry consumers search for a healthy natural substitute for sugar sweetened products, and companies have been regularly adding more of the sweet product to its zero or reduced calorie product lines. According to the August 2011 report by the market research firm Mintel, the global market for stevia is expected to reach $825 million by 2014. Today stevia can be found in a wide range of products like sodas from giants Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP), to energy drinks from Starbucks Corporation (NASDAQ:SBUX), and Yogurts from Stonyfield, a division of the French company Dannon — with new products being developed, tested, and tasted to soon enter the market. However, it’s not actually stevia that people are consuming. Stevia is the name of the herb Stevia Rebaudiana, a member of the Chrysanthemum family—a small shrub growing wild in Paraguay and Brazil. The glycosides (a carbohydrate consisting of one or more sugars which gives the plant its sweetness) is found in the plants’ leaves, and it is these refined glycoside extracts called steviosides, the sweetest being rebaudioside A (Reb A), which are being consumed. Reb A can be up to 400 times sweeter than sugar.
The problem the industry has yet to solve is that flavor and sweetness is affected by the different steviol glycosides in the leaves from plant to plant. These variations can be caused by a number of factors including the amount of water the plant received, the climate, the area it’s grown, and the cultivation method used to name a few. The difficulty that producers have found is the inability to fully control the level of sweetness, thus not being able to guarantee the exact flavor from batch to batch. The issue of consistency has been a concern to the major food manufacturers and companies have worked with their growers in cross-breeding new varieties of stevia plants with moderate success. However, present consistency is not at the level where the industry needs to be if it wants to fully expand. Be that as it may, a little company in Northern California, Stevia First Corporation (OTC:STVF), is working on a fermentation technology that may just solve the consistency issue and, surprisingly, at a lower production cost.
Robert Brooke, CEO of Stevia First Corp., commented about the consistency issue and the new fermentation technology that his company licensed in hopes of addressing the issue, “In the stevia industry, which has grown tremendously over the past several years, there is still significant unmet demand from multinational companies for a supply chain that can consistently produce great-tasting stevia extract in large quantities. The technology we’ve licensed represents a potential solution for this need, and one that our scientific team is eager to commercialize.” In other words, using the fermentation-based process Stevia First should be able to produce a consistent sweet product with the exact same taste in every batch. To better understand this process, fermentation is a metabolic process in which an organism converts a carbohydrate, such as starch or a sugar, into an alcohol or an acid. For example, yeast, which this process is based on, performs fermentation to obtain energy by converting sugar into alcohol. We’ve all seen the results of the fermentation process with yeast in beers, wines, or in rising bread. Soy sauce is made from fermenting a mixture of mashed soybeans, salt, and enzymes. And now the fermentation process can turn stevia plant material into sweet steviol glycosides.
This fermentation-based technology was developed by scientists at Agriculture and Agri-Food Canada (AAFC). AACF scientists discovered and characterized the natural biochemical pathways that were involved in the production of the sweet components of the stevia leaf. Further, they were able to isolate and remove the sweet extract through fermentation-based technologies and, through their controlled fermentation process, made it possible to convert low-cost stevia plant materials into sweet steviol glycosides. Putting it simply, through the fermentation-based technology they no longer needed to grow the entire plant in order produce the steviol glycosides, thus bypassing or significantly diminishing the need for actual stevia leaf production. What makes this process so desirable to both a manufacturer and an investor is that Stevia First now has the technology to create an abundant amount of pure stevia product in a smaller space than if it were being grown from seed to plant in the ground. This means weather or soil conditions are no longer a factor in the process. Growing and extracting the sweet Reb A accounts for roughly 70% of the costs to produce the product. Once operational this method will lower the production costs considerably. The process can also have a significant impact on the cost of goods sold because, through the fermentation-based extraction method, Stevia First would have the ability to focus its full production on the sweetest Reb A. Thus, a manufacturer could conceivably require a far less amount of Reb A in its product to achieve the same sweetness level it had previously.
In other words, if the Reb A developed is 10 times sweeter than before, it would cut the quantity needed to produce the same taste by 90%, a considerable savings.
Canada’s Vineland Research and Innovations Centre Inc. currently controls the intellectual property related to the fermentation-based technology and, earlier this year, Stevia First entered into the licensing agreement with Vineland encompassing compositions and methods for producing steviol and steviol glycosides. In addition to the license, Stevia First has entered into a separate consulting agreement with Vineland to assist with further development of this underlying intellectual property.
Stevia First is also developing its farmland in Yuba City, CA, to grow and harvest its own organic stevia plant, thus giving the company two separate methods of bringing stevia to the market. This appears to be a sound business plan considering the perfected fermentation process is roughly two years away from being implemented on an industrial scale. Therefore, Stevia First can go forward with the production of the actual crop as it continues to develop the fermentation process. However, even though they have the ability to grow stevia next year, the planted stevia production is not expected to begin so quickly. The reason, according to CEO Robert Brooke, is that Stevia First is not interested in just being a commodity stevia leaf producer. They are in the process of developing a quality stevia plant that would have high leaf yield, high steviol glycoside concentrations, be amenable to mechanized farming, and be proprietary to the company. Mr. Brooke commented, “The Company is instead focused on building long-term value for shareholders, and doing this by seeking to build a reliable supply chain of great-tasting stevia and stevia products for consumers and multinational companies with stringent QC requirements. Higher regulatory and quality control standards are what make California agricultural products desirable on a global basis. When combined with competitive pricing, it is an appealing solution for major food and beverage companies that, until now, may have been reluctant to incorporate stevia into their flagship brands.”
Stevia First is a $24.5 million market cap development stage agricultural biotechnology company. As with many developmental companies which have no sales, the stock has had a yo-yo ride with a YTD low of $0.23 to a high of $3.28. Today the stock trades in the low $0.40s. In order to expand its research and development, last month Stevia First entered into definitive agreements with institutional investors for the private placement of $500,000 in convertible debentures and warrants to purchase up to an aggregate of 1,000,000 shares of its common stock. The convertible debentures are convertible at a conversion price of $0.50 per share, while the convertible debentures will be exercisable immediately at $0.70 per share. What really struck me as a positive sign was that a condition of the closing of funding was that the company had to receive lock-up agreements from shareholders that currently own 31,500,000 shares ensuring that these shares will not be sold until at least February 2014. Agreeing to the terms tells me that the shareholders have great faith in the company’s future and direction, and are willing to lock in their money for over a year regardless of market conditions. If the fermentation technology can truly be developed on an industrial level, there is a good chance that Stevia First Corp. would be a viable company in the stevia market, and I would not be surprised if a large beverage or agricultural corporation would look to partner with or engage in an outright buy of the company. Either way, it could send the stock racing upward, and might be a great bargain for those who happen to have bought the stock at what would then be considered low price levels. But, as always, when investing in any small developmental company, caution is always advised, and one should always perform proper due diligence.
Disclosure: Long STVF