Eco Investor October 2017

Pre-Revenue Securities

Change of Focus at Algae.Tec

Micro caps often have several irons in the fire and don't find their main business activity until one of the irons heats us. This looks like it may be happening at Algae.Tec, which has now begun to refer to itself as a "plant-based health & wellbeing company". The company began life on the ASX trying to commercialize a technology that could grow and turn carbon-consuming algae into biofuel. While this commercialization activity is still in process in India, the company now refers to its biofuels and solar activities as "non-core assets that present additional upside and optionality".

In recent times news on how the company's Indian biofuels project is going has taken a backseat to its latest project to grow medical cannabis in partnership with Winter Garden Biosciences in Uruguay. This is making progress with the planting of the first 10-acre cannabis crop last month, the start of cannabis seed propagation in a controlled laboratory in Montevideo, and the installation of the first of three initial greenhouses adjacent to the crop. The plants from this process will provide the seeds and feedstock for future crops.

The controlled growing environment will enable accelerated growth, over four crop cycles per year, substantially higher oil yields, and a consistently high-quality finished product, says Algae.Tec with some enthusiasm.

So what should environmental investors make of this refocus in business activity, and is Algae.Tec still an environmentally positive stock?

The answer is sort of. It looks like medical cannabis may provide the company with its first substantial revenue. The company is also developing an algae-based nutraceuticals business. Growing products for the medical cannabis and nutraceutical markets are both environmentally neutral activities. The issue is: does Algae.Tec retain enough environmentally positive activities to be of interest to investors?

There are two activities of interest.

Given that biofuels from waste-carbon was its initial iron in the fire, it is disappointing that this is now "non-core". A pilot plant is under construction in India in partnership with Reliance Industries, and given that Reliance remains a substantial shareholder with 7.9 per cent of Algae.Tec's equity, we are left to believe that this is on track and one day may yet make a worthwhile contribution to revenue.

The other activity is its production of algae-derived aquaculture and animal feed products. Like all of its other activities, this is also at an early stage of commercialization, but both aqua and animal feeds could assist with environmental problems in these industries. Reducing the level of animal inputs into aquaculture feedstocks is a live issue for the industry. Algae.Tec says its FeedMe range of feeds are naturally derived and have an "optimum balance of essential amino acids, omega-3 fatty acids, vitamins and minerals for applications in the human nutriceutical, aquaculture and animal feed markets". The company said the FeedMe Algae product line was launched in April this year and has a growing sales pipeline. In addition, trials are underway with large-scale aquaculture companies to develop a new product line that can increase the levels of Omega-3 in farmed fish. And algae-based feeds for animals would improve the sustainability of the sector as it requires huge amounts of grains and other feeds and this puts additional pressure on land use.

Algae.Tec hopes to soon have has three revenue streams: algae-based nutraceutical products, medicinal cannabis cultivation, and aqua and animal feed products. In its presentation, biofuels was not mentioned as a near term revenue source.

Through nutraceuticals, it hopes to have about $2 million in revenue per year commencing this quarter. This would be through the sale of oils and powders to Gencor Pacific, with which it has a supply agreement.

For medical cannabis, it has buyers in place. It has planted its cash crop and is forecasting this will generate revenue of $6-8 million for the first quarter of 2018. The expected yield is 1,000 kilograms of oils, seeds, hemp fibre and algae products. It will expand to two crops in the second quarter of 2018. Its outdoor site has capacity to expand to 1,000 acres. The oil costs about $2 to $5 per gram to produce and can be sold wholesale from around $25 to $50 per gram.

For aquaculture and animal feeds, the company said it conservatively expects revenue of $1 million in calendar 2018. It says there is a significant opportunity for rapid expansion in the growing aquaculture market. Discussions are advanced with major retail outlets in North America and there is potential to increase the sales pipeline in the coming months.

As mentioned, the company's biofuels and solar activities were presented under "Non-core assets". Algae.Tec does not say why it has done this. But there is some hope. Its partner, Reliance Industries, owns the largest refinery in India and there is progress on the pilot plant, albeit slow. To date, Algae.Tec has completed the evaluation of algae species for the fuel products. The next step is to commission the pilot plant, but it does not say when this is likely.

Algae.Tec's solar activities include proprietary direct and indirect visible light energy collectors. The solar lighting technology is said to significantly reduce operating costs and can be used to cultivate medicinal cannabis.

Where does all this leave environmental investors? I am reluctant to jump to decisions. There is no harm in the company trying to grow its revenue in the ways it is. Environmentally neutral activities are fine for this.

There is the possibility that its aquaculture and animal feeds could make a worthwhile environmental contribution to these industries in the future. And if it succeeds, its biofuels project could also lead to significant carbon management activities.

So for the time being Eco Investor will wait and see how hot Algae.Tec's various irons become. Hopefully the environmentally positive ones will share the heat and environmental investors will have good reasons to continue to follow Algae.Tec.

Meanwhile, despite all the talk of imminent revenue, Algae.Tec's shares have touched an all time low of 2.4 cents. Algae.Tec listed in 2011 at 20 cents per share. It has been a long wait with plenty of changes on the way, so perhaps investors feel they need to see some hard numbers. At least Algae.Tec has now given a time frame for the first dollars to arrive. (ASX: AEB)

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Algae.Tec’s timeline for near term revenue growth.