Everybody in the investment world has a “shoulda, woulda, coulda”-type of story about an Apple, Inc. (NASDAQ:AAPL) investment opportunity that slipped by them. After all, shares of Apple could have been bought for under $4 each back in 1997. Pharmasset (NASDAQ:VRUS) was around $3 a share just four years ago, before it spiked to $160, did a 2 for 1 forward split back down to $80 and then got acquired by Gilead Sciences (NASDAQ:GILD) for $137 a share to nearly double again for its shareholders a few months ago.
Obviously, those are clearly extreme examples, but there are countless others that produced gains like Force Protection, Inc. that was a bulletin board play trading under a dollar that moved to the Nasdaq and rose exponentially. FRPT peaked at over $30 in just over a year from its lows before sliding back to around $5.00 and getting bought by General Dynamics last year. Solid companies with disruptive technologies, marketing agreements and distribution points can truly be game changers that impact the world and, as it may be, the life of a shareholder.
It does take a close examination of a company to discern what it really has to offer and just how big the company could go. Ask any CEO and you will rarely hear that the company isn’t going to be huge, so it is up to investors to perform their own due diligence and drill-down on the true potential.
Searching for companies with disruptive technologies that can provide viable solutions across multiple verticals brings BioLargo®, Inc. (OTCBB:BLGO) into the lens. The creator of patented iodine technologies, that delivers “Nature’s Best Solution®” – free iodine – to an array of problems, including odor and moisture control, disinfection, and contaminated water, BioLargo’s technology could be used in a multitude of industries that spans from household brand makers like Clorox Company (NYSE:CLX) and Colgate Palmolive (NYSE:CL) to energy giants like Suncor Energy (NYSE:SU) to Pepsico (NYSE:PEP) to premium pet product maker Central Garden & Pet Company (NASDAQ: CENT) and back again. In fact, the U.S.’s largest purveyor of pet products, Central Garden, has already recognized the value of BioLargo’s assets and signed an exclusive agreement to feature BioLargo technology in its product offerings.
Scrolling deeper in the examination of BioLargo leads to SEC filings that brought about questions that needed answered in order for a thorough evaluation.
For starters, when is the Central Garden agreement going to start generating revenue and how much cash will hit BioLargo coffers as a result? It seems assured that the deal will go, but it cannot be distinguished exactly when. With no definitive answers, the situation caters to the particular strategy of an investor as some prefer building a position in anticipation of the revenue and others favor waiting until cash is booked. How much? Per the standard, no guidance is issued, but the technology clearly has exponential uses and the agreement already signed with Central Garden calls for minimum performance thresholds that come due in the next twelve months in order for them to hang onto their exclusive rights. Consider; the cat litter product segment alone is nearly $2 billion per year, with environmentally-safe cat litter that eliminates all odor and as confirmed in side by side testing, out-performs all the competition, (which fits BioLargo’s offerings). This comprises only a small segment of the massive pet products industry estimated to exceed $50 billion annually according to the American Pet Products Association (link here). Based on the minimum purchases stipulated in the executed agreement and average prices from competitors, the deal should net between $3.5 and $5 million per year for BioLargo on the low end. However, given the accolades awarded to BioLargo’s “Odor-No-More®” product, including a 2010 “Product of the Year” award by the Horse Journal for its animal bedding product, and the recent introduction of its Nature’s Best Solution- free iodine wash products for odor and stain removal, which most certainly fit nicely within the pet product category and Central Garden’s industry leading position, then, leaning towards the low end of expectations may be the safe bet, but quite possibly a low-evaluation of much larger potential as multiple products find their way to market with Central.
This license agreement with Central Garden is the first of its type for BioLargo, and alone it could take the company to profitability.
In the company’s filings, there is one glaring statement that could make investors shudder: “current assets of $270,757 and an accumulated stockholders’ deficit of $66,554,899.” These figures could be intimidating unless a proper analysis is conducted to see how the deficit was derived and what it really means. Biolargo, Inc. was essentially a different business before 2007 when it acquired the BioLargo Technology from IOWC, Inc. and also secured the ongoing services (and inventions) of its inventor (Kenneth Reay Code), both joining the team through a reverse merger and recapitalization transaction. The corporate entity, know known as BioLargo, Inc., had a long history dating back to an original incorporation in 1989 and a series of name changes and business endeavors before becoming BioLargo as it is known today.
Not a true representation of BioLargo today or its lean business model over the last five years, its deficit on the books includes all of the operating history of the previous companies dating back to 1991, the $12 + million that was paid for the technology through the issuance of stock, and, capital raises of about $10 million (at an average of 50 cents per share) to get to the point it is at today. A more accurate reflection of the cash deficit of BioLargo is the approximately $10 million that the company has invested over its five years in operations and development costs as the company is now nearing generating meaningful revenue.
Peeling-back the onion further, the filings show that the company has taken write-downs that will benefit current and future shareholders. The $12+ million purchase price for the technology came with an ongoing $1.1+ million non-cash charge to earnings per annum once revenue started to flow. The technology was originally amortized as an asset in accordance with GAAP accounting standards. But, by later taking an impairment charge in 2009, the asset was effectively written-down to zero, meaning that BioLargo still owns the technology it had booked it as an “intangible asset” that was written-off, eliminating any more ongoing amortization expenses. Those figures are factored into the overall deficit, even though they have no ongoing implications to the company’s operations. By taking the write-down, the ongoing expense is gone and will not affect future earnings per share calculations, whereas they once could have.
Another interesting component that is easily overlooked is the $1.93 million in aggregate principal amount outstanding on various promissory notes and $750,039 of outstanding accounts payable and accrued expenses that BioLargo had on its books as of the quarter ended September 30, 2011 (their quarterly latest filing). The operative words surrounding that debt are “We may pay the principal and interest due on these notes in cash or in stock, at our option, at maturity.” In fact, putting the filings under a microscope shows that all of the true debt of the company is mandatorily convertible to equity on a fixed schedule at fixed prices. Deciphering regulatory filings may sometimes seem like running an accounting obstacle course, but when all is said and done with the BLGO books, it is not unfair to say that the outstanding debt of BioLargo could easily be thought of as equity because of the mandatory conversions.
While there will be some nominal dilution over time as conversions happen, the company’s capital position will be preserved for continuing agreements that generate revenue. The company has been running at a low burn rate of about $1.5 million a year for the last 4 years while it was going through extensive test marketing, research and development to validate their proof of claims, intellectual property protection (27 new patents filed), new licensing agreements, manufacturing and overall growing pains. With that in mind, and potential revenue from its first licensing deal estimated at a low end of $3.5-$5.0 million annually, it would not be a stretch to expect cash from sales to cover BioLargo’s operating expenses.
As mentioned, the Central Garden deal is enough to pave the gravel road to profitability, but it is actually only a small tip of the iceberg and held in the forefront of discussion because it is expected to begin performing in the short-term. After all, it’s only one agreement. As the article began, “potential” is what separates the wheat from the chaff in the developmental company investing business and provides foresight for bigger things to come. For example:
The company has recently purchased a 50% interest in the patents and other intellectual property surrounding the Isan system, a proven iodine-based disinfection system in use across many industries currently. The purchase not only opens the door to more near-term revenues, but is a perfect fit for current BioLargo technologies to become a staple in agriculture production, processing and food safety programs.
BioLargo has been selected as a founding member of a Canadian NSERC (Natural Sciences and Engineering Research Council) “research chair” formed to solve the contaminated water and tailings ponds problems associated with the oil sands industry. Canada’s Alberta Oil Sands are the second largest deposit of oil in the world, but have faced great scrutiny due to water pollution. BioLargo’s technologies can provide a solution to a major issue in the world’s largest industry and they have been recognized by the NSERC for what they have to offer. Now that’s potential.
BioLargo’s technology also has obvious applications in the medical industry and the company is quietly assembling the tools to head into that field as evidenced by a recent hire of a Key Medical Industry Executive- Tim Johnson.
If leadership is a concern for investors, BioLargo has brought in leaders with unparalleled credentials to help gear up for the big league, such as former Halliburton Chief Technology Officer, Dr. Vikram Rao, as a senior advisor to capitalize on initiatives in the oil industry; former Pepsi-Cola International VP of Technical Services Harry DeLonge as a senior advisor to assist in penetration in the food and beverage industry; and added John S. Runyan, Former President and CEO of Associated Grocers and Senior Executive of Fleming Companies, to its Board of Directors that also just added Kent C Roberts, with more than 25 years of senior capital markets experience.
For the sake of any brevity that is left, investors are encouraged to visit the BioLargo website and read their corporate press releases to better understand where the company could be headed in the future.
BioLargo has a series of loyal investors that have supported the company through the most trying economic climate of our lifetime through capital raises tallying nearly $6 million since 2008. Apparently, those investors have read between the lines of the financial reports.
Ultimately, the books for a company with a long history such as that of BioLargo can really be viewed as a case of rather strict public company accounting compliance, that requires a diligent review, which frankly most investor’s just won’t do.
Separating the actual invested capital away from the history of the shell company and recognizing that any looming debt will be converted to clear the books, provides a clearer view and representation of the way that BioLargo is operating today as it nears stronger revenue streams. The fact is that the company has proven itself well-qualified to operate within its own means since the merger in 2007 and there’s not much reason to expect anything different as larger-scale sales begin to happen.
BioLargo’s future sure seems bright to me.