Update: Ackroo

I just came back from an investor conference in Detroit where Ackroo was presenting. I had a chance to have supper twice with the CEO Steve Levely. He impressed me a lot. I bought 40k shares Friday at $0.175 partially for that reason. It also dawned on me that the investment has become much more de-risked than when I first invested at $0.15 back in December in the private placement. I was now able to buy the stock for roughly the same price with WAY LESS RISK and a CEO who has proven he can execute. That's crazy!

  • 20% growth in dealer locations during Q3, bringing monthly recurring revenue from dealer locations from $51k to $61k due to talent they retained from DealerRewards. The company’s internal goal is 5% per quarter or a total of 20% per year of MRR growth for dealer locations.
  • Added Perkins as a client which has ~440 locations throughout North America for loyalty & gift cards ($100/month). They are currently running a pilot with the largest franchise in Canada who owns 9 out 17 of them.
  • Adding another board member from the payment industry. Board will need to exercise the warrants so they can have a stake in the company in order to remain on the board. Steve is adamant about having everyone’s interests aligned.
  • There are 12 acquisitions targets in Canada and about 120 in the US. 6 players in Canada are considered significant and Ackroo is the 6th largest out of them. Steve is in talks with a few of them for acquisitions. The whole sector wants to consolidate because they’re all fighting the same competitor: paper. Only 10% of customers are stolen from each other due to the high switching costs. Since Ackroo is the only public company and therefore has access to the capital markets, private competitors are opening their books and looking to get acquired by Ackroo. Steve would rather acquire the non-profitable ones though because he can pay 1-2x sales instead of 3-4x sales for the profitable ones, and he make the non-profitable ones immediately profitable by integrating them on Ackroo’s platform and letting go of the lion’s share of the employees.
  • I believe there is no reason to be concerned about the $600k payment due at the year end to the vendor of DealerRewards. If he doesn’t get it, he really doesn’t have any leverage. Steve will just give him $50k or probably even less for his troubles just so he can say he got something
  • More cost reduction coming in Q1 2016 by moving over DealerReward’s locations to Ackroo’s new platform. They won’t need to be pay the tens of thousands (I estimate $10-20k) per month for the IP.
  • Looking at 2 acquisitions at the moment.
  • Said they will for sure be cash flow positive in Q4. In Q3, they will be slightly cash flow negative, but close to breakeven.
  • There’s a 50/50 chance they get Dominos in 12 months. Dominos has approx. 400 locations.
  • Steve is cognizant of the fact that he doesn’t have the balance sheet for the roll-up strategy. He will need to a raise, but not below $0.50/share. He will wait a few quarters of organic growth if he needs to. Time is the friend of profitable and good companies.

In short, the stock is incredibly cheap. Despite not currently having the balance sheet to continue with the roll-up acquisition and the impossibility of raising money at this time as a result of the stock price, the company can still continue to perform just by growing organically at 20% per year until the share price is high enough to warrant an equity raise. I believe the share price will seriously appreciate as the company becomes cash flow positive in Q4 and continues to grow organically at 20%. That said, the focus is definitely on the roll-up strategy. Acquisitions in this space are so compelling as Steve can acquire a recurring revenue stream with a good chunk of the costs stripped out of it since he doesn't need to retain many employees, hence the incremental 40-50% EBIT margin of acquisitions. More importantly, he only keeps the top talent from these acquisitions which raises the talent bar for the organization as a whole. It's very possible Ackroo becomes a next Constellation Software or a Boyd Group for the gift card and loyalty space. Anyone familiar with these last two companies knows how successful they have been and what kind of share price appreciation is possible.