Could Money Grow On Vertically Farmed Plants?

By Boshie - Disclosure: I am long ASIUF.OB. (More...)

(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)

I literally stumbled onto Alterrus (ASIUF.OB) (Valcent at the time) about two and a half years ago, when Chris Ng, Director of Corporate Operations at Lululemon (LULU) joined the Alterrus team. I had jumped aboard the Lulu train before it was a huge hit, back when critics proclaimed that $100 stretchy pants would not sell in a deep recession, so I wasn't afraid of taking risks when I believed in the value of something with potential. It was this article that drew me in and I asked myself why would someone jump at the opportunity to lead this small penny stock? I began to dig deeper into Alterrus and realized that there was a promising investment beginning to emerge with this small company. Alterrus was in the business of vertical farming, a method still in its infancy of utilizing urban greenhouses and little used spaces to produce plants or animal life in urban areas. Alterrus however, used an innovative approach of movable trays with a water reclamation system that increased production, while limiting water usage, providing as high as 20 times the yield of traditional field crops, while barely using 8% of the water necessary and no need for pesticides. To top this off, they had already had a working pilot at a zoo in the UK. Who better to reap the rewards of fresh leafy greens daily then the herbivore animals at thePaignton Zoo. This is what led Time magazine to name Alterrus' VerticropTM system as one of the World's Greatest Inventions in 2009.

I was sold and I knew I had to add the call letters, ASIUF into my iPhone's stock list, and that I would then continue to follow this company intently. The ability to produce leafy greens that are delivered daily to groceries, without having to traveling thousands of miles from California (for those of you that do not live in California), definitely had my attention. This would allow for grocers to streamline their produce supply by receiving shipments several times a week, rather than every Tuesday. As Chris Ng stepped into the reigns of CEO, there were some very dynamic changes that began to take place for the company. At the onset, a name change to Alterrus was the first step in creating a new life for the company. Alterrus soon developed key partnerships with the City of Vancouver and Vancity bank to develop a fully functional Verticrop system at the top of an unused city parking lot. Alterrus signed a 10 year lease with the City for the use of the parking lot rooftop for $2,300 a month with the option to move onto the lower level for expansion. One of the key aspects of Alterrus that identified a successful business plan was the realization that a strong brand was necessary for the success of the product. Alterrus developed of a strong brand name in choosing Local Garden. The interesting aspect of Local Garden is that it is transferable to any municipality or urban setting, while still retaining a brand name that may have a national recognition. The first local setting was chosen as Vancouver, and Vancouver's Local Garden was born. There are several vertical farming upstarts throughout North America, such as the Plant in Chicago or Lufa Farms in Montreal, however, what differs from these companies to that of Alterrus, is the smart business strategy that Alterrus has built upon.

Once financing was in place and the rooftop facility had begun construction, Alterrus partnered with local restaurants to supply fresh leafy greens to these high end restaurants, both gaining brand equity and market as well as local exposure. Popular restaurants such as "Restaurant Wars" Trevor Bird's Fable restaurant were eager to partner with Chris Ng. What better than to supply a customer that regularly consumes leafy greens daily, a move no other Vertical Farming company had used? Lastly, Alterrus' partnership with Institute B not only achieved the necessary private financing, it further helped launch Alterrus into a revenue generating company in less than two years, achieving the status of the first publicly traded, Certified B Corporation. Sustainability has become a much more significant strategy in today's fast moving economies, developing a significant niche in new business planning and strategy Sustainability is affording companies much more equity into brands and company products as customers become more aware of corporate responsibilities, which with social networks, these could have significant effects (Monsanto; (MON) and Abercrombie & Fitch (ANF) case in point). B corporations are certified by an outside nonprofit organization, B Lab, to determine if the company meets rigorous standards of social and environmental performance, accountability and transparency, so for Alterrus to be the first publicly traded B Corp is quite significant.

Local Garden has fined-tuned its production to leafy green lettuce, Arugula and the recently popular and nutritionally recognized Kale, with Basil soon to be available. These products have been flying off shelves in numerous local organic markets in Vancouver, such as Choices Market, Fresh St Market, Organic Acres, and recently available online at Spud.ca. Alterrus hasn't stopped there with the types of products available in their vertical farming tray system. They have recently been in talks with large scale producer Bird's Eye, one of the UK's leading food producers, aftersuccessful trials in December growing Basil within their Paignton Zoo production facility; Extended trials that have Bird's Eye's interest have focused on pea, spinach and other green production, with a keen interest on a considerably scaled up production.

Now, let's look at the numbers to evaluate the profitability of this venture. Alterrus estimates that 150,000 lbs of leafy greens per year would be produce in their rooftop facility, with an approximate 200 trays per day being harvested. Each of the current packages contain ~ 142 grams of leafy greens be it Rooftop Salad Mix, Arugula, or Kale. These packages sell for ~ $5 - $6/ package. Typically, since grocers have a significant spoilage on produce, markups are in the range of 50 - 75%, strawberries being at the higher end due to their short shelf life. This is a key aspect as Alterrus is able to quickly adapt their logistics of deliveries to account for low supplies with new deliveries in terms of days, not weeks as is the case with most California supplied produce. As such, using a markup of 50% would be viable for the Local Garden products, providing revenue of $2.50 to $3.00/ package. However, since a good portion of the produce is supplied to restaurants, one can assume that the produce would be sold in bulk and therefore revenue generated per package would be less than the consumer price due to the higher quantities. Therefore, to be conservative let's assume $2.20 per package of revenue is generated. With 150,000 lbs per year (68,039,000 grams/year) produced, this provides Alterrus with annual revenues of approximately:

68,039,000 g/year / 142 g/package x $2.20/package = ~$1.05 Million.

Now let's look at the costs of operating the facility. With the current 10-year lease rate, annual lease costs are south of $30,000 annually ($2,300/month). Using a conservative monthly utility cost of ~$6,000 a month for water and electricity to operate the Rooftop facility (year round car washes could see water bills of $3000 a month) , and an annual payroll of $400,000 (10 people at ~$40K a year including benefits; Alterrus hires most of its workers through Mission Impossible; an organization that aims to help those that face poverty, homelessness or other challenges find meaningful work), we get an annual total operating cost of: $30,000 + $72,000 + $400,000 = $502,000.

Alterrus partnered with Vancity to obtain a ~$500,000 loan to fund the initial construction costs of the rooftop facility as well as marketing and some other miscellaneous expenses. Though it was not fully tapped, let's assume it was at 15% with payback in seven years, the payments would be under $10,000 a month. So with ~$120,000 annually being paid to VanCity, we have a total operational cost of: $622,000. Let's assume $100,000 a year is added for all the deliveries of these tasty salad bunches that are delivered via bike carrier, and we get a conservative total of $702,000.

Let's calculate potential revenue and profit. As we are seeing with the number of restaurant customers, and grocer markets, as well as my own investigative research contacting the grocers of these markets, Alterrus' Local Garden products seem to be moving very quickly off the shelves with deliveries as often as twice a week at some grocers. At full potential revenue, assume that the 150,000 lbs a year of produce may be sold; One package of Rooftop Salad Blend (as well as Kale & Arugula packages) retains 142 grams of leafy greens, with each package selling for between $4.00 - $6.00 per package. There would be at least some margin on these products, however, most produce have little margin for grocers as they make up that margin on most of the other products. So taking a $3.00 - $3.50 cost for the grocer, and assuming the restaurants are receiving these at an even greater discount that than of the grocers, a safe conservative assumption is a revenue of $2.20 per package. Therefore, 150,000 lbs (~68,040,000 grams/year) equates to a potential of 68.04K grams / 142 grams = 479,148 packages, which generates ~479,148 x $2.20 = $1.05 million in revenue.

Within one year, Alterrus would nearly have the capital to build a second rooftop facility. With the option to expand onto the second floor of their parkade facility, Alterrus would easily be able to increase this revenue, particularly if additional products such as spinach are possible. More so, with shared costs, profits would be much greater than the $300,000, potentially pushing the $1M mark. This one facility in Vancouver has the ability to produce ~$1M in profits, which, when compared to its current share price valuation, provides a PE ratio of 5.76. With facilities in every major city in North America, let alone Europe, as well as facilities next to major produce processing companies, the potential for this company is staggering. These calculations are just estimates, and I have attempted to add as much conservatism as possible, to account for other overhead costs, such as management, and marketing. However, what this number crunching exhibits is the large profiting potential of this company, and with additional facilities, the profits may become that much greater. I am not suggesting that this stock is going to sky rocket, no one can predict the future. I can say however, if you are looking to get in on the ground floor of an innovative, exciting company, that is implementing first mover technology effectively, as well as retaining the leadership and business strategies to succeed, Alterrus may just be ripe for the picking.

Additional disclosure: I am suggesting that Alterrus shows much promise, though still a risky investment, if you are looking for higher risk returns, this may be a good stock to watch. And yes, I take my own advice and own shares of this company.

Souece: www.seekingalpha.com