New Position: MEMEX Inc. (OEE.V)

Current Price: $.10
Shares Outstanding: 98.3M
Total Fully Diluted Shares: 128.1M
Market Cap: $9.8M

Disclosure: Long shares of OEE.V

Introductory comments: My favorite kind of investments are ones in which I feel I am investing at a real inflection point in the company’s business cycle. I would rather be slightly ahead of the real inflection point in order to provide significantly more opportunity for upside, albeit with more risk, then investing after the inflection point is triggered. And I love investing in companies right at the point where they are about to make a very strong sales push with a product, or products, that have demonstrated effectiveness. For the reasons that will be discussed below, I believe that MEMEX provides investors with an excellent opportunity at this time to invest prior to the company’s infection point fully being triggered. 

The Company: MEMEX is a leader in Industrial Internet of Things (“IIoT”) software. The company develops products that drive operational efficiencies by creating visibility for manufacturing managers on previously unavailable real-time productivity metrics. Its flagship product, the MERLIN (which stands for ‘Manufacturing Execution Realtime Lean Information Network’) communications platform, connects to any machine and provides Overall Equipment Effectiveness (OEE) metrics in real-time, from “shopfloor-to-top-floor”. To put it simply, Memex’s MERLIN product connects machines to management.

The company is led by David McPhail who is considered a manufacturing expert and entrepreneur who has been very successful in his own right in his previous ventures prior to purchasing MEMEX out of receivership in 2007. Second to David is Dave Edstrom, the company’s Chief Technology Officer, who helped develop the open-source standard for M2M (machine to machine) communications as the President and Chairman of the MTConnect Institute. 

Financials: The company has spent the last several years building the product and getting the technology right and ensuring that their balance sheet was capable of handling the significant growth that potentially lies ahead. They completed a significant private placement in June 2015 that raised $3.9M cash. The company’s cash position, as a result, is strong with over a year of cash on hand to support its prospective growth. The company expects to hit breakeven by the end of 2016, so the hope is that by year-end the company will be able to operate directly from cash flows and profits, becoming a self-funded company without the need for any additional financing other than for pure growth purposes. 

Here is a snapshot of the company’s financials taken from the most recent MD&A:

What is MERLIN? MEMEX’s flagship product, MERLIN, is the first “shop-floor-to-top-floor” manufacturing communications platform in the marketplace that addresses all machines on the factory floor irrespective of make, model or origin. With MERLIN, “no machine is left behind” and all industrial machines can deliver analytics and plant utilization metrics in real time. Proven in single and multi-plant installations on three continents, MERLIN delivers a 10% to 50% average productivity increase, earns 20%-plus profit improvement based on just a 10% increase in OEE, consistently achieves payback in less than 4 months with an Internal Rate of Return greater than 300%, and connects to any machine, old or new. There are several case studies available in support of these  numbers, which can be seen in the most recent investor presentation by clicking here. MERLIN sells for about $4k, which is approximately half the cost of competitive products. Gross margins on each sale are currently in excess of 70%. 

The Opportunity: I think it is important to take a look at some of the milestones from Fiscal Year 2015 in order to understand the momentum that MEMEX is generating. These bulletpoints are taken from the most recent MD&A. 

  • MEMEX sold MERLIN to 32 new manufacturing customers in Canada, Mexico, the United States, and Australia.
  • In August, MEMEX was invited by Mazak, a customer and global machine tool leader, to join its Value Inspired Program (VIP) program. MEMEX is the only such partner offering software in its category. 
  • In June, MEMEX completed a $3.9M capital raise. 
  • In March, MEMEX qualified for up to $800k in funding from the Government of Canada through FedDev Ontario’s Investing in Business Innovation (“IBI”) initiative. 
  • MEMEX acquired the intellectual property and other related assets of Dostek Inc. and engaged its President, Doug Struthers, in the role of MERLIN Direct Numerical Control (DNC) Architect to bolster MERLIN’s DNC product capabilities. 

1. Market Opportunity: 

While I generally like to ignore “market opportunity” talk, I think in the case of MEMEX it’s easy to understand the addressable market…every single manufacturing factory in the world. The company believes the total market opportunity is around $320 Billion.

The below graphics illustrate the potential not only to expand their business within current customers’ manufacturing locations, but also demonstrates the diversity of potential business opportunities around the world based on where existing clients currently manufacture.

2. Smartbox

Mazak, one of the world’s largest machine tool manufacturers, is also one of the MEMEX’s largest customers and a MERLIN reseller as well. In November of last year, MEMEX joined with Cisco and Mazak to develop and launch the Mazak SmartBox.  SmartBox uses the Cisco Industrial Ethernet 4000 Series Switch to offer a secure, scalable way to connect machines to OEE platforms. The all-in-one 4000 not only connects machines to OEE solutions, but it also provides security and computing capabilities. The switch’s technology resolves the problems typically associated with access, management and scalability, thus enabling both IT and manufacturing-operations people to work together to drive machine efficiency and visibility. The SmartBox is scheduled to be available to the global manufacturing marketplace in March of this year. 

3. Resellers

As the company grows its reseller network globally, we can expect sales to grow as well. Under the reseller model the company is able to partner with resellers around the world who can handle project implementation and installations for their clients using the MERLIN product. 

4. Currency Windfall

The company currently books all its revenues in US Dollars, while a majority of the company costs are all in Canadian Dollars. This should provide a significant windfall to the company in the coming years as the currency rates likely will begin to normalize. 

5. Incentives for Manufacturing to Come Back to the USA

It’s no surprise that there is a big push by our government to bring manufacturing back to the USA. In doing so, there are all kinds of incentives available for on-shoring manufacturing operations. Equipment and software, such as MERLIN, can be expensed up to $500k under what is known as the ‘Section 179 Deduction’. Additionally, as more and more manufacturing begins to slowly move away from China, a product like MERLIN will be in high demand as manufacturers have to operate as lean as possible in a world where margins continually get eroded. 

Biggest Risk: In my opinion the biggest risk that MEMEX faces is the rate of adoption for manufacturers to utilize IIoT technology. It is estimated that 90% of all manufacturing facilities have not implemented any form of IIoT, and should the adoption rate not materialize as the company expects, it will present a significant issue for the company’s growth prospects in the future. 

Conclusion: General Electric has pronounced that IIoT could add up to $15 TRILLION to global GDP over the next 20 years. MEMEX is becoming well positioned to benefit from the underlying theme of IIoT, and is connected with great customers and great partners to execute on the opportunity.  What excites me most about the position of the company right now is that they have a beefed-up cash position, a product that has proven to consistently provide significant ROI to customers, and a sales infrastructure now in place and aggressively pursuing sales. This is, in my mind, a formula worth investing in.

Disclosure: Long shares of OEE.V