My friend, and fellow DIY Investor, Liam Zerter, visited the Cantech Conference in Toronto this year (2019), and wrote about his thoughts on five of the MicroCap companies that were there (three of which are included in my Future 60 MicroCap stocks list – Good Life Networks, Kraken Robotics, and Patriot One Technologies).
(Updated on February 27, 2019)
By Liam Zerter:
I got a chance this year to participate in the 2019 Cantech Investment Conference, a showcase of multiple innovative and relatively unknown small cap technology companies. Here is my quick review and ranking of the most interesting companies on my visit.
1. Good Life Networks – “A digital advertising company that operates the world’s highest-speed programmatic video ad exchange”. Unfortunately, I did not get to speak to anyone from this company, but it was fellow Capital Compounder member Thomas Birnie that brought it to my attention. When he mentioned it was trading at 2x EBITDA, my Spidey senses picked up immediately (Even though I am not a fan of adjusted EBITDA as a metric). My first introduction to this company was from diving into the latest conference call in which the CEO’s voice appeared to have been subbed in by the voice guy from all those movie commercials. I quickly found out this was the actual CEO Jesse Dylan. He just happened to be a radio show host in his past life. Apparently completing his work day at 9:30 a.m. led him into becoming a proficient business dealer and negotiator, simply because at 9:30 a.m. there “was no one around to play with”. There is a lot more to dig into for assessing the talent of this company, but at first glance, it looks promising with competencies in sales and programming capabilities.
If the company The Trade Desk is a stock market equivalent of a broker, just in selling online video advertisements, then Good Life Networks would be the actual technology integrating and providing the activity for the act of selling and buying. Consider it as the stock exchange equivalent, but for online video advertisement. The competitive advantages right now are in the speed to make advertisement video streaming decisions, the ability to weed out false advertisement space, protecting the anonymity of user identity (which has become a significant issue for the likes of Facebook and Google that are under fire for this by governments), and higher quality audience targeting through the use of AI learning. Of their two acquisitions of Impression X and 495 Communications, it is my opinion that Impression X is the more accretive acquisition to Good Life Networks strategy. Impression X connects video streaming to smart TV’s and devices like Roku, and Apple TV, which could be a great expansion avenue.
Good Life Networks currently trades at trailing 1x sales, and 0.5x sales after adjusting in the two new acquisitions. 2019 and 2020 are forecasted to hit $67 million and $100 million in revenue respectively. Good Life somehow picked up a very good deal in debt financing at prime +1 ¼% (This blows my mind! It should not be possible for such a small company with little history to get such a good rate). Dilution to acquire the two new acquisitions caused the share count to jump up to 93 million with all warrants and options factored in. It has 0% attrition of clients (though the company has only been around a short time). I expect further acquisitions as this company attempts to string together a full-service company, perhaps similar to that of its competitor AppNexus which was bought out for $1.6 billion. At a market cap of just over $20 million, there is a lot of potential for this company, and it is clearly mispriced when considering its potential and quick success. By the end of 2019, the company could reasonably trade at 1.5x to 2x sales if it hits its targets, putting a price target on the company between $1.09 to $1.45 (Which….is a price target that makes me sound like a complete and utter nutcase as it trades at $0.31). The concern I have is how defendable a moat it currently has. A company like AppNexus or The Trade Desk with significantly more resources could move into Good Life’s space and crush their main business. I currently hold a new position in Good Life Networks.
2. Xebec Adsorption – A manufacturer of equipment that transforms raw gasses, such as the emissions from landfills, wastewater treatment facilities and farms into renewable natural gas and hydrogen. The company has a strong backlog of business contracts to fill in Italy and France as a result of EU governments’ pursuit to reduce the impacts of climate change. Strong future growth potential exists in the U.S. and Canada through contract wins for new builds and tuck-in acquisitions of smaller companies in the $1-$5 million range. This will allow Xebec Adsorption to build out its recurring revenue servicing arm. The company’s competitive advantage is in its technologies’ ability to recover gasses more efficiently than its competitors, leading to more profitability by its users who collect higher gas volumes for resale. The company currently trades at $1.05 with a $71.4 million backlog, and a market cap of $68 million. Revenue in 2017 of $14 million growing to a projected $28 million to close out 2018 shows the company has finally hit an inflection point. 2019 revenue targets are $40 million with 25% as recurring revenue.
Management has a target for EPS of $.05 – $.07 for 2019. My favorite insight into this company came from my discussion with CEO Kurt Sorschak about his greatest fear. His concern was if his company gets taken out before it gets to realize its full potential. If a takeover offer occurred, let’s say 50% above market price, his 14% ownership won’t be enough to defend against the instant gratification that shareholders would most likely accept if such a scenario occurred (Kurt is hungry, I like this guy!). In my opinion, considering the defensiveness of the industry and the growth Xebec could experience, trading at 20x 2019 eps would be a fair valuation. If Xebec can deliver, and come out of 2019 with $.06 cents in clean diluted EPS, I see no reason for the company not to trade at $1.20 at a minimum. However, on the risks side, Xebec could experience cost overruns during this high growth period. I currently hold a new position in Xebec Adsorption.
3. Kraken Robotics – “A marine technology company engaged in the design, development and marketing of advanced sensors”, software and underwater robotics for Unmanned Maritime Vehicles used in military and commercial applications. I spoke with Greg Reid, CFO and their Investor Relations Consultant at the conference – this company is easily the smartest collection of people attending the conference. I heard a stat once that there were over 450 separate air based drone manufacturers. Think of Kraken Robotics as underwater drones that sell for $1 million plus, and in most of the different forms of servicing there are really only 2 competitors that can provide any one type of service effectively. The reason behind this is that lithium batteries under a great deal of pressure are going to explode at major ocean depths. Their acquisition of a German company manufacturing lithium gel batteries was transformational in that this allowed Kraken to fully manufacture a subversive drone, and now at a cost far less than the competition.
Kraken robots are more efficient than their competitors at scanning the bottom surface of the ocean, and one unit can be built and sold with a healthy margin. Talking to the CFO, his big dream in 5 years is to have revenue at a stable minimum of $100 million a year with 30% coming from recurring revenue projects. I believe this is one to watch for a dip in order to get a position, as at a market cap of $93 million the company might be a little bit ahead of itself. I like management and I think it has a great defensible niche where it is positioned to dominate its market. If their devices start getting used in military applications at just a fraction of the scale that air based drones are used, this company could take off. Kraken Robotics is on my watch list.
4. Patriot One Technologies – Covert weapon detection systems. This is simply a great idea. This company has built a smart scanning system that scans to pick up trace metals and signature patterns that make up the identity of dangerous weapons. When it scans for signals, it measures all items across a database and alerts security when it comes across a dangerous object. The great thing about this product is that you can hide it inconspicuously. Patriot One also entered into a joint venture to develop a chemical detection scanner for narcotics, chemical agents, and volatile organics. Furthermore, the business has a smart video surveillance system leading to a potentially even broader service offering.
Currently, the PATSCAN covert weapons detection system is still in the research phase. The true positive rate is only at 91.6% and the true negative rate is at 94.4%. I see the true negative rate as a bit of an issue. If 1/20th of the signals are ghost signals identifying that something dangerous has passed through an area, the system will essentially be “crying wolf” too frequently to be trusted. However, this technology is still in the early stages and likely will improve in time, and the video monitoring AI is a great complement to follow up and reassess the potential threat. At a market cap over $300 million, the market has already priced in some big expectations for this company. Patriot One Technologies is on my watch list.
5. Timia Capital – Recently I came across a podcast on esoteric lending on Patrick O’Shaughnessy’s Invest Like the Best. Essentially esoteric lending is the process of using different data metrics to identify clients that were deemed risky by traditional banking risk measurement procedures, but in reality are actually low risk clients. Timia Capital has an interesting niche in lending out with credit terms of 20% interest to high growth technology companies. When you think about a technology company’s assets in today’s world, they essentially don’t have any hard assets. A technology company’s patents, goodwill, and people are what make up the value of these companies’ balance sheets, which is not the kind of asset make up that a traditional bank considers high quality.
Using complex algorithms Timia Capital invests in companies that are growing very quickly with high cash flows, but have little in real assets, and subsequently have nowhere else to turn to for getting the working capital needed to expand. Timia also structures the deal so that they get payments to the loan as a percentage of the revenue that comes in. If the company theoretically defaults they would take ownership and could sell the company off at a decent return.
This company has a great concept; however it’s a bit too small. It needs to grow a larger lending book to have the economies of scale to show decent profitability before I’ll invest. Management mentioned they were planning to meet with Constellation Software that week in Toronto for reasons they did not divulge, which caught a bit of my attention. Timia Capital is on my watch list, and I expect it to take some time until it can become attractive.
***Information above was pieced together using company websites, yahoo finance, presentation materials, and discussion with management. The accuracy of information is to the best of my knowledge.