Yes, 25 years. A quarter century worked, with $38m in financing raised over the last 14 of them, and it’s all come together in the last 12 months.
That sure sounds like a deal I wouldn’t have liked to have been a part of 25 years back. But the beauty of the Venture exchange is when you can find a deal that is ready to start tearing it up, while the rest of the market looks down on it and sniffs.
Meet Clearford Water Systems (
TSXV:CLI,
Forum), a Canadian company that has hit upon a very simple idea; rather than everyone sending all their wastewater through aging sewer pipes to one huge central location where it would be treated at great expense, why not have localized tanks that perform primary treatment of the waste, then send the 75% treated water to the central plant?
Let’s put it another way – why have a huge pipe from your home into a huger pipe in the street to an over-sized treatment plant so your system can handle those few peak hours a day when everyone is showering getting ready for work, or coming home from work and bathing the kids?
Why not have a small biodigester tank installed that buffers the system from those peak periods and separate the sludge, sending solidsfree water through nice small pipes with fewer pumping stations to a smaller, more efficient treatment plant?
Well, there are a few reasons why not, and Clearford has heard them all the last few years.
“We like it but we can’t afford it,” is one refrain.
“We like it but we don’t trust it,” is another.
“We don’t like it because we haven’t seen it anywhere else,” is another still.
Around the globe, hundreds of thousands of towns, villages, campgrounds, industrial parks and other facilities are building waste water treatment systems to either upgrade from failed septic tanks, or replace ancient systems not intended for today’s wastewater needs. Some have to build their own plants, at great expense, and run them locally. Others have to spend large amounts of money tapping into other systems, or make do until provincial governments chip in to help. Others – namely developers – have to cover the cost of adding to the existing system before they can do their business of helping to grow the towns.
Kevin Loiselle, President and CEO of Clearford, points out the obvious; “Dealing with municipalities is hard. Dealing with small towns is harder. You’re talking to people who have day jobs and devote a lot of time to serve as Councillors. Now the town has to build a sewage system and they don’t want to saddle their town with a massive capital expenditure and ongoing maintenance. Then, if the town has to run things themselves, that’s a whole other problem. It’s a big deal. Some of these decisions can take years.”
Loiselle knows that full well. He’s seen those years stack up when he was an employee of the company. Now he has the wheel, and he’s steering hard to some new places.
“Look, we know our technology works. It’s just the sane way of handling things. Take the solids out at source, send the liquid in smaller quantities to the existing treatment system, or a system designed to take it, and the pressure is off. You’re not taxing the system unnecessarily, you’re just sending in cleaner water, and 75% less sludge, which is what takes so much water to slosh along, clogs up your pipes and costs a lot to treat in big central plants .”
He’s right. He’s so obviously right, it hurts. Why the hell have our town fathers been utilizing systems that are so outdated and expensive, rather than moving towards an inexpensive, local treatment solution?
Well, because it costs money upfront. So Loiselle removed that obstacle. First Clearford reduced the cost by about half, then made funding painless.
“We could see some towns just didn’t have the upfront cash or the tax base to carry the debt to fund their system. So we did a project financing deal with a company out of Switzerland, that has since bought 14% of our business, that affords Ontario towns the ability to tap into a $100m capital fund to get their system built, using our technology,” he says.
“The fund carries the capital expenditures, we build and operate the facility , the town charges homeowners normal sewer rates and pays us a user fee with a thirty year Pay for Performance (P4P) Agreement. We give the system to the town and are paid by the user fees,” says Loiselle. “No need to raise taxes, no need for excessive levies.”
You know those fancy bus stops and restrooms all over every North American city, with the huge bus shelter ads all over them? Those facilities are provided free to the cities in question, in return for the right to sell the ads. As a way to receive free infrastructure, the deals make sense for councils and their ratepayers, even if, over time, the company providing the facility makes out like a bandit. There’s similar thinking going on with the Clearford financing arrangement. Need a sewer system? Clearford has the tech to reduce costs – nearly a 50% reduction at that – as well as ease pressure on existing facilities, allow development of more homes without needing to radically expand the central waste water receiving facility – all of that AND they’ll cover the financial outlay and you only pay as it works?
It’s kind of a deal.
But Clearford faced that issue every company with new tech has faced, especially those dealing with local governments – the concept of ‘show me one that’s working so I can know I’m not about to do a dumb deal with you.’
Clearford has typically chased deals for as long as several years, first working in Ontario, then moving into India, where the rate of infrastructure improvement is considerable.
“We’ve seen it all,” says Loiselle. “We’ve seen Mayors that want it with engineers that aren’t interested in looking at it, and we’ve seen it the other way around. We’ve seen developers being asked to build an entire new system before they can add new homes to an area. Typically, current sewage collection and treatment costs aren’t completely covered by local fee collections, so it becomes really important for everyone – ratepayer, developer, engineer and council – to fix this problem. Clearford One products cut costs in half and P4P finances the investment over 30years of use. User fees that don’t cover traditional replacement costs of conventional systems, cover capital and operating costs with Clearford One and P4P. 25 years later.
At Clearford, the rubber is hitting the road, today. At the time of writing, Clearford has heard back from a council meeting where the topic for discussion was a $16m system to be approved.
A $16m Clearford One system, that is. The opposing bidders were more expensive, like way more expensive, and reportedly like to suggest to anyone who will listen that Clearford One is too new to do business with and Clearford is too small to matter.
The alternative was to pay double now, pay double for operations, and increase taxes to pay for it, if you ‘re into the whole ‘go big or go home’ mindset.
So where’s the downside for investors? Glad you asked.
Clearford has a debt load. But chill, it’s okay.
“We are in the process of raising $3m, so we aren’t in any danger. And our long term debt -$24m- is interest-only for the next 20 years. If that $16m contract is granted, the debt situation becomes infinitely better overnight,” says Loiselle.
A second contract, for a $10m system, looms large, and because a lot of the munis they’re working with need larger or new systems because of growing housing development and crumbling infrastructure built in the early twentieth century, councils are inevitably charging developers and/or citizens for a lot of those costs.
The Clearford deal takes away the need to build on the citizens’ back, and gives towns and developers options for what to do with the savings that come with Clearford’s package.
Let’s talk for a moment about technology, because that’s an asset we haven’t touched on yet, and Clearford has some.
The way existing septic tanks work, the sewage enters the tank with as little impact as possible and the solids settle to the bottom. About 1/3 of the solids are digested but 2/3 stays until it is manually pumped out. The contaminated water flows out to a tile bed to seep away into the soil. A lot of land is needed for each house to prevent contaminating the drinking water.
The Clearford ClearDigest Smart Digester (two ‘clears’ and two ‘digests’ in the one title!) actually churns the water using a patented energy-free system to mix the solids, which keeps the bacteria in your tank working to digest about 80% of the solids. The Digester also modulates flow to the treatment plant making pipes and plant smaller and easier to operate and maintain. Because the first Clearford tanks were installed 25 years ago, they have data to show these systems maintain the quality of water flowing to the pipes and only need to be pumped every few decades.
ClearDigest treats the sewage and it goes to ClearConvey as liquid. This liquid goes to ClearRecover which performs final treatment in a plant that meets local standards….in Canada that is full treatment with the latest technology to produce clean, disinfected effluent. In rural India the treatment is usually a structured wetland and disinfection of the outflow.
“We’re seeing the benefits now of the fact that this is a consistent engineering package and process,” says Loiselle. “The first time around, engineering departments need to study every aspect of the technology so they can be sure that it does what we promise. Now we have case studies, deep stats, and little variation between packages from one town to the next, so they’re quicker to approve and install. A
$1m project in Fetherston, Ontario, will be commissioned shortly, took just six weeks to approve and 12 weeks to build.
“We expect to see Clearford One with P4P become a “must compare” system that communities will use as a benchmark to test the wisdom of investing in conventional waste water collection and treatment systems”.
When a developer shows up at a council meeting and wants to get approval for a large project, waste water treatment is always a bottleneck.
“You’re typically waiting for the queue to work its way through engineering and that can be a long queue,” says Loiselle, “with a lot of money sitting on the table just waiting for the process to grind through. Our ideal is that those large developers can use us – ‘bid Clearford One’ as it were – and remove those delays because the wheel doesn’t need to be reinvented every time. It’d be like installing a roadside guardrail or an electrical transformer – you’re just following the process and installing a product that’s already accepted and trusted. That’s when we really scale.”
And those systems for India are coming. A development in India is set to be commissioned by March 2016. “It’s actually a really big deal – this is the first open defecation-free village in the state of Gujarat India. It’s been a very high profile push supported by politicians and a billion dollar Infrastructure Company. The demand and urgent need for these systems is clear. This village will demonstrate popular acceptance. The opportunity for Clearford is enormous” Loiselle says.
Okay, so we’re all on board now, right? Clearford has tech, it has a need, it has a product that is way cheaper, lasts longer, and a financing model that takes away the panic on the fundraising side. It has a product that can serve developing nations, which means the opportunities are nearly endless.
So what’s next?
This: Clearford managed to pick up UV Pure, a small UV purification company which has 15,000 reference installations, positive cash flow for the last five years and did $2.7m in revenues last year… for just under $3m. That company has a technology called Crossfire that runs water through a pipe with UV light outside the pipe, which disinfects said water as it passes through. Reflectors behind the pipe send the UV rays back through the water with rays bouncing in all directions. Standard UV systems put the light in the pipe with the water flowing around the light, but solids in the water shade the bad bacteria from being fried. Crossfire hits the bacteria from all directions so there is nowhere to hide.
Chlorine is used in 52% of the water disinfecting systems out there, but that number is falling. UV is in 35% of systems, and is rapidly rising. The Boeing Dreamliner uses UVPure on board to purify water it takes on as it travels the world. So do the owners of some 15,000 other systems they’ve installed.
In fact, the acquisition of UVPure makes Clearford the best UV purification play in the public markets. And when they’re building Clearford One, placing a UVPure unit at the last step of the process makes the entire system all the more efficient, clean, and effective
Personally, I like the UV Pure play almost more than the Clearford corporate parent proper. For mine, if it were a pure play tech startup that had just appeared on the scene, it’d be worth $12m easily. That Clearford found it and snared it for cheap before anyone else figured out its worth comes down to how much attention they’re paying to the space.
Loiselle is putting his money where his mouth is and buying the stock. The Chairman currently owns 15%, other officers and directors ditto. A Swiss group owns 44% and the Signina financiers have 14%.
That means 11% is left for the public, which makes this an elastic stock. When there’s no news, it goes down accordingly, but news is coming which makes a case for this as being a great time to take a look.
I’ll say this – in doing my research about this company, it became clear to me, before I even talked to Loiselle, that this thing has some real potential, so I personally took a position. The current $0.22 level is a solid discount to the $0.50 that the most recent financing came in at, and volume is noticeably rising.
Revenues are up 2200% over Q3, but considering the company was making five-figures back then, it’s not nearly deep enough into the earning phase to crow about. Yet.
But if you start seeing news releases about more towns voting yes to installing Clearford One, or you see their village toilet blocks making a real change in India, now you know what’s up.
Bid a Clearford One indeed.
--Chris Parry
https://www.twitter.com/chrisparry
FULL DISCLOSURE: Clearford Water Systems is a Stockhouse Publishing marketing client.