There were a total of 12 companies that presented at the MicroCapClub conference this year. In this post, I will share my notes and first impressions on the other 10 not already discussed in prior posts. The companies are: Lingo Media, Omni-Lite Industries, Covalon Technologies, Leatt Corporation, B-Scada Inc., Zoom Telephonics, IRONCLAD Performance Wear, Where Food Comes From, SMTP Inc. and VirTra Systems.
A good number of these companies were interesting and certainly worth looking to and buying in my opinion. We will update our watch list to include some of these companies that we find most promising.
Lingo Media (LM.V, LMDCF):
- They just announced their largest contract which is in Columbia. Part of it will be recognized in Q3 and the remainder in Q4.
- My friend visited their facilities and said that the place was overcapacity. Management confirmed that their board room is packed to capacity and there are multiple employees per office. They're going to have to rent out space soon.
- The royalties from the legacy business are only paid out in Q2 and Q4.
- New contracts are generally recorded in the quarter they are announced and then they are renewed the next year at 50% of the original cost. After the second year, there is no more revenue generated from them.
- The CEO's cost average is $1 and he took part in every private placement the company has had.
- The board owns 22% of the company.
- Takes 30-60 days to get approval for a deal.
- They sell via distributors who take a 50% commission. The company records net revenue on their financial statements, hence the 80% gross margins they report.
- Management is confident there are a lot more contracts that will be coming. I believe them in the short-term, but don't know how sustainable this business plan is long into the future.
Omni-Lite Industries (OML.V, OLNCF):
- The company manufactures precision engineering parts for the automotive and aerospace sectors. Their revenues are split 50-50 between both these industries. Their largest client is Alcoa.
- The company has 110 parts which are certified for the aerospace sector. It takes approximately 10 years to get a part certified, which explains why plane making is a long cycle.
- Their margins have decreased from 44% to 37% as they need to hire more quality engineers. The certifications continue to demand a never-ending improvement in quality.
- They manufactures about 120M parts per year. Some of the parts they produce are fasteners (used to fasten the skin of the wing to the wing structure in an airplane) and valve lifters for cars. Their parts are mostly small components.
- The company's parts are found in Airbus and Boeing airplanes. Some of the parts are actually in the Airbus A380 (the full double-decker airplane). They even sell to companies such as ADIDAS and Nike. With regards to ADIDAS, they sell the composite material for the soccer cleats.
- Omni-Lite can only undertake 6-7 new projects per year and as expected they always chose the one that has the highest ROI.
- With the current facility, they can do a maximum of 25M in revenue per year.
- The company is actually trading at a biggest discount to book value then the formal calculation because their facility isn't reported at market value on their books. If I remember correctly, the value of the facility is around 1.2M on the books after depreciation. They initially bought the building for 1.5M and it's present value is 4.5M.
- CEO owns 18% of the business.
- They are looking to uplist on the TSX in order to close the valuation gap (get the higher multiple that they deserve).
- The exit strategy is to sell the business as there is lots of consolidation in this sector -- Warren Buffet acquired PCP which itself acquired 140 companies throughout it's history. Competitors have historically sold for 15x EBIDTA which means Omni-Lite could get taken out at a significant premium to it's current price.
Covalon Technologies (COV.V, CVALF):
- They only invest products and do no manufacturing.
- They sell exclusively through distributors.
- In 2014, they did $9M in sales and earned $3.4M. On a trailing-twelve month basis, they are $7-12M in sales.
- Will eventually uplist to NASDAQ to close valuation gap with comparables (comps.) CEO has done this multiple times in the past so he's familiar with the process.
- The exclusive distributor agreement they signed last year didn't work out because the product supposedly would cannibalize the distributor's sales of other products. Furthermore, the distributor didn't even end up launching the surgical product. The cancelling of the agreement was mutual and Covalon will receive a sum for the termination this year. They will be able to start selling the products again next week since that's when the contract is officially terminated.
- CEO said he would be disappointed didn't double in next 2-3 years.
- Deals can take 3 months like they can take 1 year to negotiate.
Least Corporation (LEAT):
- FANTASTIC products. Their neck brace, which is their first product, currently has a 64% market share. Their newly release products (the helmet, elbow pads, water bottle backpack and knee brace) should have similar success as a result of the superiority of their technology.
- The stock is pretty expensive. I would be a buyer if it dropped.
- Takes 2-3 years to get new products developed.
- Management is very solid and smart.
- This was my favorite presentation out of the stocks that I don't own (Ackroo & XPEL).
B-Scada Inc (SCDA):
- CEO owns 30% of the company and he said "I'm all in". I liked him because he's a true entrepreneur.
- The company has good revenue growth over the last few years and every year has been better than the last. That said, the growth rate can be a little lumpy.
- The company is looking to break into the IoT in the next 6 months.
- Starting to sell their own sensors soon. It's just for incremental revenue. The main business is really the data acquisition softwares.
- I like this one and I think it could be a successful company. I still prefer my other holdings at the moment though. Would recommend anyone to look into this one though if they are interested.
Zoom Telephonics (ZMTP):
- The company does internet modems.
- The stock has been a 10-bagger this year because they signed a deal with Motorola.
- One of few competitors in the space because the certification process is very hard to pass.
- CEO thinks the potential revenue is 50-100M and the potential earnings are 4-8M.
IRONCLAD Performance Wear (ICPW):
- Product was interesting. Their gloves are the best in the business from what I understood.
- They want to grow rapidly and are starting to sign lots of distributors agreements.
- I like their marketing strategy in stores. Instead of placing their gloves on the shelves next to the others, they will have their own shelf with the different versions of their gloves (see picture below).
- Again, this company is worth looking into, but I don't like it more than my current holdings. May appeal to some though.
Where Food Comes From (WFCF):
- This stock is a large position for many investors that I know in the US. That said, it's become fairly priced so the upside is less than it used to be IMO. It's very interesting because of the monopoly aspect of the business.
- Got lost in the presentation since everyone in my group knew the story and they asked questions that only one who studied the story could understand.
- Will sell 1M tags this year @ 2$ a unit.
- Aiming to sell 2M tags in the next 2 years.
- Is targeting 25% growth YoY and SG&A (sales, general and administrative costs) should remain the same).
- Currently auditing 30 brands and each brand has around 10 products.
- The cost to audit is $2500 per location (they usually have another firm do the auditing).
SMTP Inc. (SMTP):
- I didn't really like this presentation and the company either.
- The CAGR (componded annual growth rate) is 45% meanwhile the market itself is growing at 60% YoY according to the data from their presentation. They said they are currently investing heavily in growth which assuming it brings them to 60% growth YoY implies that they won't be gaining any market share since they are growing at the same rate as the market. What's more, they will be unprofitable and burning through a good amount of cash during this investment period in growth.
- Their competitive advantage is questionable. They say the full version of their software is priced at the same price as the "lite" offering their competitors. When I asked them how their cost structure allows for such cheaper pricing, I didn't get a proper answer. They just said it's because they sell through agencies. But then I flipped over to the next page of their investor deck, and I saw that some of their competitors also deal with agencies and are actually in more agencies than SMTP is. I think their lower cost comes from the fact the agencies deal with the maintenance of the software instead of SMTP whereas competitors do the maintenance themselves.
- The legacy business is losing revenue every year which actually skews downward the sales/EV multiple of the business, making it look cheaper than it actually is. I think the business is overvalued and it's not the most quality one that I know about. That said, I would be a buyer if this were trading at the right price just like most other investments.
Jirtra Systems (VSTI):
- The company does police training simulations
- Their product is WAY better than competitors. Competitor's products don't have 5 screens which makes the simulations inaccurate.
- That said, the products are expensive coming at $199k/unit. Competitors products are around $139k/unit.
- Revenues have been growing every year for the last few years which is always interesting.
- 158M shares outstanding. However, the company will be doing a reverse split in the future. The dilution happened under 2 different CEOs in the past.
- Insiders own 10%.
- The lead time from a sale to revenue recognition is anywhere from 60 days to 1 year.
- They are putting up the IP and technology in a partnership with another company that wants to create a "Top Golf" for shooting simulators (aka a place where you can use a shooting simulator and drink beers/alcohol). This either works out or it doesn't, but is very interesting. I would definitely give it a try, but I think reporters could bash this idea because guns and alcohol combined aren't such a great idea. Who knows. At least they didn't put up any money so it's all upside if it works out and they collect their royalty.