Deal To Watch: Getting Rid of Wastewater Pollution

Key Stats:

Summary

The BioLargo Water Investment Group Inc. team has been selected as a “Deal to Watch” by KingsCrowd. This distinction is reserved for deals selected into the top 10%-20% of our due diligence funnel. If you have questions regarding our deal diligence and selection methodology, please reach out to hello@kingscrowd.com.

Freshwater is a vital resource for everyday life. As climates grow unstable and demand for water continues to increase, we must strive to become more cognizant of how much water we waste. Perhaps even more important than that, though, is finding new, innovative, and cost-effective ways to recycle what is used. One company at the forefront of this movement is BioLargo Water Investment Group Inc.

Problem

Freshwater is a lot less common than many people may realize. While around 70% of the Earth’s surface is covered by water, only about 3% of it is freshwater. Furthermore, 2.5% of all freshwater is stored in our planet’s glaciers, leaving only 0.5% of the resource to drink. Although there is a fair amount of water within that tiny percentage, the global population continues to rise, and methods for reusing or recycling wastewater lag behind in terms of technology and price. One area of significant waste is the poultry industry. By one estimate, the processing of an average chicken requires about 7 gallons of water, which is left highly contaminated afterwards. With 9 billion chickens slaughtered in the US each year, 63 billion gallons of wastewater are produced annually. There are ways to recycle it, but these methods can be costly. They also generally require a large footprint for the companies that initiate the recycling. 

Solution

One company that believes it has the answer to these issues is BioLargo. Since its inception, the company has been awarded more than 65 grants, amounting to more than $3.6 million in funding. It has used this funding to find a new way to recycle contaminated poultry water. Its proposed solution is its Advanced Oxidation System, or AOS for short. Management has not discussed in great detail how its technology works, but their claims are huge. AOS uses oxidation processes to render various microorganisms, such as E-coli and salmonella, inactive while also removing various waterborne pollutants.

AOS also cleans poultry water better than competing technologies. The device is fairly small, and as a result, it uses less power than competing options like chlorination, ozonation, and ultraviolet radiation. BioLargo estimates that the capital expenditures for installation of their system should average about $63,956. This amount is substantially lower than the $132,788 needed for competing UV technologies and $223,618 for ozone-based ones. The cost per cubic meter is also substantially lower. Overall, AOS brings significant cost-savings over current competition, both in terms of installation and continued operation. 

To get its foot in the door with chicken processors, management intends to be generous. Initially, it plans to install its devices for free. Only after they can prove that the technology works and will save money will the company begin charging its clients. They refer to this as their “No Risk” model. This confidence from management should instill even greater confidence in investors. The same can be said of prospective clients as well. On the other hand, if the company is wrong, the pain from the high expense of installations could come back to bite them. 

As one might expect of a firm that is still in its early stages, there are some issues at the financial level. Official financials have not been provided for 2019 yet, but the records for 2017 and 2018 can be evaluated. In both of those years, the company generated nothing in the way of revenue. Its net loss in 2017, though, was $740,511. In 2018, this narrowed some to $570,505. Its aggregate cash outflows during this two-year period were a little over $1.30 million. Each year’s results closely mirrored the company’s respective net losses. 

An Important Niche

The poultry wastewater market is not a niche most people think about, but that is what makes it all the more ripe for the picking. It also happens to be sizable considering how obscure it is. In 2018 in the US, 9 billion chickens were slaughtered, which amounted to 56.8 billion pounds of output. Of this, 42.1 billion pounds were marketed and measured on a ready-to-cook basis. Not all of this was consumed in the US though. About 17% of what was produced was exported to other countries. We estimate that the US market accounts for about 22.2% of the global market. This translates then to about 256 billion pounds, or 40.5 billion chickens killed annually.  

While beef consumption has declined and pork consumption has remained mostly steady, chicken has grown increasingly popular in the US. Back in 1960, the average American consumed only 28 pounds of the bird each year. Last year, that number was 96.2 pounds, and this year it’s forecasted to rise to 98.5 pounds. Chicken is by far the most popular protein in the US, and there’s no end in sight for its consumption. Given this demand, it is apparent that the amount of poultry wastewater will only continue to rise. There is a distinct need for new and improved technologies to deal with the issue. 

Currently, it is costly for chicken producers to deal with wastewater. The average chicken requires 7 gallons of water in order to be processed. One source pegs the average cost per 1,000 gallons at $1.50, which translates to $94.5 million in costs to the US poultry system each year. If we assume the same figures globally, this cost rises to $425.7 million. Though the US figure is only a small part of the $46.3 billion in sales generated by the industry, the food space is not known for having particularly attractive margins, and every penny in savings brings value. 

An alternative to letting this water go to waste is to recycle it, but as we already discussed, the cost of doing so is high. In some cases, it can make sense for firms to dispose of the water and bring on fresh water to use, as opposed to recycling what they already have. BioLargo hopes to change that. Using their estimate of $0.13 per cubic meter of water, the operating cost of recycling the resource for the US market would be around $31 million. That amount is about a third of the $94.5 million cost the industry currently spends on freshwater each year. Extrapolated globally, the opportunity might be worth around $139.6 million. Although this figure is materially lower than the $250 million market the company said exists, BioLargo still has plenty of room for expansion. Management stated that the poultry market is only their first step. Using data from 2012, they identified five other areas where they hope to expand. The market opportunity of all of these spaces together, they calculated, would be about $44.75 billion. Given the growth in each of those markets over time, that figure is likely far greater today than in the past. 

Terms of the Deal

In order to move forward, the management team at BioLargo is looking to sell some of the company to interested investors. It is doing this by offering common shares in the enterprise, subject to a minimum contribution per participant of $500. The goal is to raise between $100,000 and $500,000 in this raise. So far, the company has only received commitments amounting to $2,500. This low level of interest is unlikely due to the underlying technology or the market opportunity. Instead, it’s probably due to the high pre-money valuation management is aiming for of $16 million. That’s awfully high for a company with zero revenue. 

An Eye On Management

BioLargo has a rather extensive team of individuals working on it and with it. The company is not as simply-structured as other startups though. There’s a BioLargo Inc. and a BioLargo Water Investment Group Inc. The latter is what holds the technology and what investors will ultimately own. At the head of this firm is Dr. Richard Smith, President and CEO. He is also currently the President and CEO of BioSmith Technologies. Before that, he was a Coordinator of Research Development at University of Alberta. Another important person at BioLargo is Dennis Calvert. He is the President, CEO, and Chairman of the Board at BioLargo’s parent company, BioLargo Inc. Before his time there, he ran a consulting firm called Dennis Calvert & Associates. Before that, he was the founder and Vice President of Merritt Hawkins & Associates. 

The Rating: Deal To Watch

After a careful review of BioLargo, KingsCrowd has rated the company a Deal to Watch. There is a lot to weigh when evaluating this startup. The market potential for BioLargo’s solution is significant, and it is impressive that they are proposing an innovative and economical technology for recycling poultry wastewater. Their plans to expand into other markets is also promising, as it indicates that management has a well-developed vision. However, the firm’s current lack of revenue is a drawback for investors. The high valuation is also disconcerting, as there is no true market validation for the AOS product at the moment. Overall, BioLargo has intriguing technology and encouraging market potential. If the company can fully realize its goal, it will certainly be a disruptor to the wastewater market.