BioLargo Inc. (OTCQB: BLGO), developer of Nature's Best Solution - a proprietary version of iodine - formed to help solve a variety of common problems around the world, appears to be a bargain at current levels. From pet supplies like those sold at PetSmart Inc. (NASDAQ: PETM) to household brands like those sold by Clorox Company (NYSE: CLX), the company is targeting a number of different industries with products moving closer to commercialization.
Heading in the Right Direction
During the second quarter, BioLargo reported revenues that jumped 13.2% due to increases across all three of its Odor-No-More branded product lines. While the company's overhead costs appeared to increase on the income statement, this was primarily due to non-cash expenses related to the fair value of employee stock options issued.
On its balance sheet, the company reported a cash position that more than tripled to $515,304 and total assets that grew 160% to $638,006, as of June 30, 2012. The firm's total liabilities also fell 10.6%, as it eliminated its long-term liabilities, reduced its shareholders' deficit, and ultimately improved long-term shareholder value.
While these financials represent a very small fraction of the company's long-term potential, they do demonstrate management's commitment to lean operations and movement in the right direction. Moreover, the results suggest that the firm is at a tipping point where early investors may stand to make the biggest gains by purchasing ahead of the news.
A Small Fraction of Its Potential
BioLargo's improving financial condition may be good news for investors, but the revenues represent just a small fraction of its potential. The company's CupriDyne technology is applicable in numerous end markets, including animal health, environmental remediation, oil and gas, consumer products, food processing, medical and water treatment.
CurpiDyne technology is unique because it enables molecular iodine to be delivered in a calibrated dose that's safe at high levels and efficacious at low levels. Since it's created by combining a mineral and salt, it can be developed in numerous forms, including tablets, drops, powders and even as a water-soluble ink, depending on its targeted industry.
These target industries represent billions in potential revenue opportunity. Capturing just a small fraction of one end market would make the company's $18 million market capitalization seem extremely cheap, much less bringing products to market in multiple industries. And recently, that's exactly what the company has been aiming to do.
BioLargo's Low-Hanging Fruit
BioLargo's low hanging fruit is the animal health market, where its technology can help eliminate odor. In March of 2011, the company signed an exclusive license and supply agreement with Central Garden & Pet Company (NASDAQ: CENT) - a nearly $2 billion company that's a leader in the pet and lawn care industries.
From the outside looking in; the pet industry has 2 major pet shows where products are typically launched, Global Pet (which is hosted in the late spring) and the upcoming Super Zoo 2012, which will be held in September. If Central wants to hang on to its exclusive rights then one might assume that they would likely want to get started with product introductions this fall. The agreement calls for the purchase of at least 1.25 million pounds of product by March 2013, and in the two years after that, the agreement calls for the purchase of at least 2 million and 2.75 million pounds of product, respectively for Central to maintain its exclusive rights.
Using sales figures from competing products and standard industry margins, the minimum run rate from this agreement could take the company to $3.5 million to $5 million per year. These figures should help the firm expand its revenues and generate positive cash flow over time, while building in value with a guaranteed 3% increase in the agreement each year its extended.
BioLargo Moves into Wound Care
BioLargo may already be undervalued given its pet products, but there's even more value in the other industries it's targeting. In May of 2012, the company announced that it formed a subsidiary - BioLargo Medical Group Inc. - to advance proof of claims and pursue regulatory approvals in the $19 billion advanced wound care industry.
The wound care industry faces many problems, including the threat of microbial resistance. With many wound care products employing antibiotics, the increasing exposure to humans has produced resistance bacteria like c.diff and staph. BioLargo's product does not use antibiotics and therefore may find itself in high demand within the industry.
In August, the company added former Smith & Nephew Wound Management Vice President Tanya Rhodes to its management team as a senior strategy advisor. With more than 20 years of experience in the industry, bringing staple wound care technologies to market, Ms. Rhodes is the perfect person to help the company expedite this new lucrative line of business.
Starting to Look into Oil & Gas
BioLargo is also actively pursuing development in the oil and gas industry. In particular, the company's antibacterial products provide oil and gas companies with a way to solve many of their environmental problems. The company's technology can be used to do everything from treating flowback water in fracking to cleaning up the water used in oil sands projects in Canada.
Last December, the company was selected as a Founding Member of a Canadian Government backed research chair to develop sustainable solutions for the oil sands industry. Water released from the oil sands is expected to reach one billion cubic meters in the Athabasca oil sands region alone by 2025, creating significant demand for a solution.
Consumer, Dairy & Much More
BioLargo's opportunities extend even beyond these industries. In a March 2012 press release, the company elaborated on several other projects it's working on:
BioLargo developed a free iodine liquid wash and hydrogel product for both consumers and companies. The company has already made initial sales to consumers and has begun to deliver the products to industrial customers for trials. BioLargo contracted a dairy industry distributor called Green Alpha Solutions LLC that will utilize its products to prevent infections and enhance the quality and quantity of dairy products produced in the $35 billion industry.
BioLargo developed a family of consumer products called DeodorAll™ that remove household stains and odors. The Home Shopping Group will produce, manage and broadcast a series of direct response campaigns over the coming months.
Enormous Opportunity at a Small Cost
BioLargo represents an enormous opportunity for shareholders given its ongoing progress in these many end markets. With a market capitalization of under $18 million, investors can purchase the stock for a fraction of its potential valuation. Meanwhile, the company's improving financials and recent sales suggest that it will become cash flow positive over the near term.
The company's platform technology and broad potential across many markets provides investors with greater diversification and lower risk. Meanwhile, the firm's licensing business model provides investors with greater leverage, which could mean less capital outlay and higher free cash flow over time, as the company builds its pipeline of products.