I am excited to share with everyone an excellent recap of the recent Microcap Conference in Toronto by my friend, Ray Bonneau. You can follow Ray on twitter at @raybonneau.
Ray began his career as a software developer, eventually transitioning into the business-side after completing his MBA. Today he manages Global Product Management and is responsible for the success of software solutions for customers around the world. He began investing 20 years ago and has had many ups and downs through the years trying to find profitable opportunities with many mistakes and lessons learned along the way. Today, the micro-cap space offers opportunities for profit and Ray likes to use his experience from product management to search, discuss and share information concerning these opportunities.
Ray's Recap of the Microcap Conference, 2016
I attended the MicroCap Conference in Toronto on April 11th and 12th. The goal of the conference is to bring together investors and companies in order to facilitate discovery of micro-cap opportunities and provide networking time. Approximately 40 companies attended and were able to present an overview to attendees for 30 minutes each. Investors were also able to schedule one on one meetings with the attending companies in order to ask specific questions, gain a better understanding of the business or just learn about the company. If you have not attended one of these micro-cap conferences, I highly recommend to attend one of the upcoming conferences. I had a great time, and met a lot of other great investors along with many discussions with participating companies.
The conference was structured with a set agenda for speakers and participating companies' presentations over the 1.5 days. Then each investor participant was able to schedule 1 on 1 meetings with the participating companies at any time during the 1.5 days. Because of the way 1 on 1 meetings are scheduled, it was impossible to listen to all the speakers and participant companies. I've summarized what I was able to attend below. It's a whirlwind while attending the conference as you race from session to session, but highly rewarding.
Canadian Micro-Cap Stock Out-performance - Stephen Foerster - Ivey Business School
Mr. Foerster presented during the Tuesday evening dinner, and shared his studies concerning the out-performance of the Canadian micro-cap socks over multiple decades. Using data from the Canadian Financial Markets Research Centre from 1950 to 2009, the study was able to determine that the smallest stocks outperform larger stocks over a long period of time. The study used a portfolio of stocks that was held for 1 year and then turned over each following year. The out-performance was considerable and more in-depth information on the study can be read in the published study "Northern Exposure: How Canadian Micro-Cap Stock Investments Can Benefit Investors" in The Journal of Investment Consulting.
Emerging Technology - Sean Peasgood - Sophic Capital
Sophic Capital is a business that mixes Investor Relations (IR) and an investment portfolio focusing on technology stocks. Sean Peasgood presented his company’s view on investing in disruptive technology stocks of which a handful were participants at the conference. Some top themes presented as disruptive technologies are Virtual Reality (VR), Financial Technology, Industrial Internet of Things (IIoT), Voice over IP and Counterfeiting Security. If you're interested in this space, Peasgood covered the following companies: Spectra7 Microsystems (SEV.V) in VR, Memex (OEE.V) in IIoT, Apivio (APV.V) in VoIP, and Nanotech Security (NTS.V) in Counterfeiting security.
Nate believes that a lot of value lies in the small bank space. Banks with assets under $1B are of particular interest since these businesses either need to grow their asset base or sell themselves since they are being pressured by the government to build to a $1B base. With a catalyst in place, many of these small banks are of interest and Nate presented a list of banks that he thinks are undervalued with assets under $1B and an ROE greater than 7%.
Deep Value - David Waters - Alluvial Capital /OTC Adventures
David presented his views on micro-caps which was to seek out value in small companies and hold until that value is realized. He prefers companies that are not high flyers, but are undervalued either on an asset basis or on potential for future growth. More interesting was his coverage of some of his past mistakes which he highlighted as most investors can learn from the mistakes. When purchasing a stock that is deemed undervalued by the market, a thesis is usually constructed before buying the stock, and in theory the stock should be held until the thesis has played out, or the situation has changed nullifying the thesis. David covered some past mistakes that should be taken to heart such as selling when a thesis isn't playing out and the stock is falling. The company used in the example was a company with lots of cash flow, but also considerable debt. The thesis was that the company would continue to receive cash in order to pay down the debt. However, debt needs to be turned over if it isn’t paid off by the end of the term and this can have a dramatic effect on the cash flow situation. Even with some warnings that the debt situation could be of a concern when refinancing, David didn’t sell, even though the thesis was in jeopardy. The company was unable to refinance at attractive rates, and the new rates severely impacted the current cash flows and the investment thesis was broken. The stock ended up dropping over 50%.
Small-cap growth at a reasonable price - Maj Soueidan - GeoInvesting
Maj presented on the benefits of Growth at a Reasonable Price (GARP) within the micro-cap space. Some investors believe that either deep value or high growth companies make up the micro-cap space and that opportunities to buy GARP companies are not available in the space. This is untrue, and Maj was able to discuss some opportunities in the past that have led to his success and GeoInvesting's success.
The following handful of companies I had set up one on one meetings with and was able to discuss the business with executive(s). I've included some of my thoughts and opinions as well as information that companies provided to me. I will not comment on the current valuations or if you should buy or sell. The information and opinions should be taken as my opinions and not as fact, and please due individual research on any company that you are looking to invest. These individual company meetings are great, and I suggest investors use the ability to meet with as many companies as possible.
Ackroo - AKR.V - Steve Levely, CEO
The current Private Placement (PP) is ongoing and Steve does not want to keep it open for too long. If the PP can get to $1m it will close if the feeling is that it will not fully subscribe. The main use of the cash is to pay off the Dealer Rewards (DR) liabilities which is costing Ackroo to the tune of $125k a month. $100k a month is the actual purchase agreement and lasts until the end of the year, and $24k is an additional cost as Ackroo cannot move the DR clients over to the Ackroo platform yet. Two outstanding features need to be completed to eliminate the $24k 1) Build integration to a particular DMS provider and 2) Build a specific report. Once these two features are built, the customers can be moved over to the Ackroo platform and the $24k per month will be eliminated. If the PP can be closed and used to pay off the liability and the features built to move the customers over, it will eliminate $124k per month which will drop to the bottom line. This is a major task in order to get to profitability, and should be realized shortly if the PP can close. The rest of the money will be used to build the business which includes potential acquisitions.
D1 mobile purchase was a product/technology purchase, and allows Ackroo to offer a solid mobile solution to customers. The current Ackroo platform was weak on the mobile front, and D1's mobile technology is a big step up for mobile for the loyalty business. The gift card business is still mostly physical cards, but loyalty program needs a strong mobile application for end-users to use.
The OnTab purchase was also a technology acquisition and allows Ackroo to offer many more payment options to Merchants. The current platform only allows Paypal to be used to refill cards through the Ackroo platform and is a big limitation if merchants do not want to pay the Paypal fees. It was suggested that this is a limitation for certain merchants, and prevents growth of the platform. The payments gateway from OnTab allow Ackroo to connect to many, many more payment providers and allow Merchants to now select which providers to support for their customers.
The Point of Sale (POS) integrations are the key to the gift and loyalty platform providers, and the more POS systems that are supported, the more appealing it will be for merchants. If the gift card or loyalty program cannot interact with a merchants POS system, it has no value. It sounds like Ackroo is close to releasing support for Catapult and Quick Service POS systems. Quick Service’s POS is named ClearviewPOS and is used by Wendy’s, Tim Hortons and other fast food vendors. This could clearly open up a big list of potential opportunities in the future. This is a key to the investment in Ackroo - the addressable market is only as large as the customers of the supported POS's!
I asked about the cost and attrition rate for an M&A integration. The company didn't have any data on the cost of an integration or how many customers will leave on average during the transition phase. The integration of technology and operations is a big factor in the success of any M&A transaction and so far it sounds like it hasn't been too much of problem. Dealer Rewards has been slower than anticipated, and costing much more than the initial purchase price because of the $24k expense until the customers can be moved over to the Ackroo platform.
As the platform is being built out, complementary businesses will be investigated as growth options. The current organic growth rate is equal to the market growth rate at 15-20% which isn't too exciting. If the organic growth rate was greater than the market growth rate it would indicate that Ackroo had some advantage and was taking market share, but that is not the case. I think it will be important for Ackroo to build out the platform and investigate growth options for future acceleration and differentiation.
Kraken Sonar - PNG.V - Karl Kenney, CEO - Greg Reid, CFO
Kraken Sonar seemed very upbeat about their prospects and current business and Karl was very enthusiastic about the company and its products. The success of the AquaPix sensor is demonstrated in the current financials and momentum is building as new opportunities are found, bid and sold. However, I was more interested to discuss the business model of moving upstream and building towed vessels and Autonomous Underwater Vehicles (AUV). History shows that companies are successful at moving downstream but have a tremendously difficult time moving upstream. For instance, it's much easier for a current UAV builder to move downstream and start to produce components themselves such as sensors and software since that business already has the understanding of the detailed requirements of the components since they use them to build the UAV and have the existing end customer relationships. It is very difficult for a component maker to begin to build the vessels because the component business does not have the detailed requirements for the vessel nor the end user/customer relationships. A whole new business needs to be built including knowledge, credibility, infrastructure (people, processes, products) and sales.
The Elbit order is still moving forward and the estimate was that the time from order to revenue recognition would be 9 months for the KATFISH product. This is the first order for KATFISH so that company is still building out the production process with an anticipation of shipment in the fall (August/September). The company recognizes revenue after shipment. The full Elbit order will be shipped by the end of the year. After the first product shipsthe order to ship timeframe will be drastically reduced and production throughput should be able to handle $25m to $30m a year in KATFISH orders. At $1.5M per order for KATFISH results in capacity to produce and ship roughly 17-20 KATFISH tow vessels per year unless investments are made to expand production capabilities. The order from Elbit which is a defense contractor for the Israeli government is a big stamp of approval for the company and the new endeavor which is a positive signal that the company may be able to pull off the upstream move.
The evolution of the business is to eventually build a fully autonomous unmanned underwater vehicle (AUV). The Thunderfish is the name of this new vehicle and is being built using the resources from the acquisition of Marine Robotics Inc. This makes sense for Kraken because they did not have the expertise to build an AUV with current assets, but with the purchase of Marine Robotics, the company received qualified personnel and assets in order to build a full solution including the software necessary to run the vehicle. In addition, it sounds like Kraken has been hiring key personnel in order to build the business with the proper knowledge. Over 70% of the resources and processes used to build the KATFISH product will be used to build the ThunderFish product and most of team will transition to the project in August after the KATFISH solution goes into the release phase.
The company is aware that they will still need to build up marketing and sales as they move upstream with the KATFISH product.
Some new orders should be coming in for the AquaPix sensors, and the company is still focused on selling and growing the sensors market. In 2019, the company believes that they can grow to $50m in overall sales including sensors, KATFISH, and ThunderFish. The total addressable market (TAM) is about $1.5B so overall this is just a small piece of the overall market with lots of runway. The company is focused on building a business around the products and is taking an aggressive, but measured approach to be successful. The company expects to be profitable at the end of 2016, and should easily hit the 2016 sales goals as about 70% of the target are highly confident orders.
I got the sense that the company believes that it will eventually be sold to a larger company in order to fully invest in the business to scale. My hunch is that this won’t happen until after the ThunderFish product is on the market, but the situation may change.
Medicure - MPH.V - Dawson Reimer, President/COO
I wasn't too familiar with Medicure before the conference but I did some research to be prepared to discuss with management. I think it's an interesting opportunity and I wanted to ask some specific questions about the business and figure out what happened to this company in its earlier years. If you are not familiar with this company, it's a specialty pharmaceutical company that began in 1997 and went public in 1999. Prior to 2008, Reimer called it Medicure 1.0 which was a business trying to discover and develop drugs which was not successful and drove up a lot of debt and liabilities. To the company's credit, they made a pivot and did some moves financially to save the business but at the same time not to wipe out shareholders (or severely dilute them). It is now Medicure 2.0 and the company is hitting its stride with the Aggrastat drug.
Aggrastat is a drug that was acquired from Merck in the mid-2000s and its target market is primarily the United States. It is a platelet inhibitor used in Acute Coronary Syndrome situations which means that it is used to block the clotting of blood in high risk heart attack patients. The company applied for a supplemental New Drug Application (sNDA) in September of 2015 to prescribe the drug to STEMI patients which is another classification of heart attacks. There are a handful of competitive products, but Aggrastat is about 50-60% cheaper and has the same benefits. Net Revenues were$22m for 2015 and are growing very quickly. The drug does not come off patent until 2023.
The current market share for Aggrastat is about 36% on a patient share basis and if the approval for STEMI occurs it will expand the possible market by 20-30%. On a revenue basis, the total addressable market is roughly $110m CAD on a net revenue basis (this is using Aggrastat pricing assuming 100% market share). This number will differ if you aggregate all competitor revenues since those per unit costs are much higher if all patients took Aggrastat. The company is targeting growth and market share gains anticipating a majority market shore in the future. The anticipated date for an answer on the sNDA is July 2016 for the STEMI expansion.
The company is a one drug company, and this was a drug that was acquired from Merck. The company has never successfully developed and released a drug in its history. Future diversification opportunities are required to de-risk the revenues and spread across multiple products. Acquisitions are a high likelihood as the company does not have the platform to develop drugs at this time.
The company invested in a manufacturer of generic drugs named Apicore in 2014. The company owns 5.3% of equity of this private company and went in on the deal with Signet and Knight. Medicure has an option to buy the company outright through June 2017. It sounds like the company really wants to purchase Apicore as the business is good and provides a route of diversification for the company. They have offices in the United States but most of the lab value is in India which is a major hot spot for development of drugs and would provide Medicure with an interest going forward. I would image that Medicure would not have enough cash to purchase the remaining 35% of equity from the Apicore founders, and the equity interest from Signet and Knight meaning that an equity raise or securing of debt would be necessary to exercise the option.
A new drug is in “development”, and the manufacturer is Apicore - this appears to be the direction forward with Medicure in order to bring new drugs to market. Apicore has more than 80 products and 50 customers so it is much more qualified to develop new drugs than Medicure. I believe that this is a smart strategy for the business to diversify but also to gain additional revenue streams.
The company, in order to refinance debt and obligations during the transition in 2008 and not go bankrupt, negotiated a deal that requires payment of ~5.5% of net revenue on Aggrastat sales to the debt hoolders. This financing royalty lasts through patent expiration (2023). You'll notice on the financial statements a large financing number, which is where Medicure line items the royalty as it's more of a financing agreement than a straight royalty to a product manufacturer. The debt holders, in addition to the royalty, received $5m in cash and 15% of equity in the company.
A big competitor of Aggrastat is Integrilin and that drug comes off patent in 2018. A generic will be made available, but no concerns about the impact of pricing on Aggrastat. Since Aggrastat is sold at roughly $570 and Integrilin at over $1500 the anticipated generic would be priced around $1250. Actually, the company could possibly raise prices a small amount after gaining a large market share but need to be careful in the climate of the United States after the Valeant situation. The government is starting to inspect drug pricing programs at specialty pharmaceutical companies and no need to get in trouble with the government.
Memex - OEE.V - David McPhail, CEO
Memex is in a hot industry as solution provider within the Industrial Internet of Things (IIoT). The company has two big company alliances that are helping to pave the way forward, Cisco and Mazak. Mazak is both a partner and customer and they are a big manufacturer of machines and are helping to resell the product globally. Cisco is a partner in the SmartBox solution, and are a provider of the Internet connectivity. I've seen this play out before in the past with small companies working with Cisco, and it's a strong possibility that eventually Cisco will be an acquirer. This is just my feeling based on past experience and nothing expressed from Memex directly. I did pose the question but received the expected answer of not trying to sell the company at the moment and focusing on building the company.
The way I see the IoT landscape is through three distinct layers. Device connectivity being the lowest layer, followed by the data storage layer and finally the analytics’ layer. I don't believe that the connectivity layer will bring much profits to any company focusing on this layer as it will be commoditized. We can see that with in the manufacturing space, the MTConnect protocol supports real-time communication of machines and is an open protocol. It is imperative for the IoT story that the devices actually connect to the Internet and to each other. Because of the connectivity need industry standard protocols will be developed and not much business value will be extracted from this layer. The second layer is the storage layer of all of this data (Big Data). I think a few companies, mainly the DB companies, will extract the value from this layer and not much is left for new entrants. The third layer, and in my opinion the most valuable, is the analytics’ layer followed by automation of processes based upon the analytics. The Merlin product is focused on this analytics ("Top Floor") story and can provide efficiency gains in existing tools/machines by automating processes that were previously handled by humans. The Merlin product brings immediate business value to manufacturing facilities, and has a quick payback period - the only problem is that the manufacturer's need to alter the current processes. It's evident the Memex is having some trouble fully rolling out the solution in factories, and instead are sporadically installing the solution. This means that the existing customers are trialing the product but in order for the customers to fully realize the value, they will need to change existing processes, and that takes time and training. Memex is building out a customer training and best practice team in order to help customers alter the existing processes and realize the full impact of the Merlin solution. This should help solve the issue of having many customers but not realizing full revenue potential of each. Memex has stated that the current customer base, if fully rolled out, would be $30m and the company is putting the pieces in place to make that happen.
The path to rapid growth lies in Memex's ability to train customers on how to properly implement automated processes for the machines using the Merlin software. Many factory floors are still using paper-based processes including humans walking around taking readings and entering the data into Excel or some kind of document. If they can build out this team, I believe that revenue gains will quickly follow building momentum by building credibility in the market through customer testimonials.
It was stated that the company would be cash flow break even at $6m in revenue, which is about 3 times that 2015 revenue numbers. David believes that he can build this into a $300m valued business with revenues above $50m. Memex has a head start on a full IIoT solution that is working today with real customers and a very large addressable market. It's interesting to note that the solution is an on premise based solution which was dictated by customers (security reasons). The company is building the next generation of Merlin which will be a cloud/hosted solution with a SaaS model while also supporting an on premise deployment. Beta is coming soon for this next iteration of Merlin but I didn't get an exact date.
The end goal is surely to be acquired at some point in the next 5 years after the business has built up a sizable, recurring revenue business.
Biosyent - RX.V -Joost van der Mark - VP Corporate Development
I am a current shareholder in Biosyent, and I believe that this company is building a very strong business. If you are not familiar with the business, it is a specialty pharmaceutical company which imports already approved products from other regions and gets them certified by Health Canada and releases them into Canadian market. They typically have an exclusive license for distribution in Canada and focus on solutions that will have up to a $20 revenue opportunity in the country. By focusing on smaller revenue opportunities allows the company to avoid strong competition from big players, and can build out a strong portfolio of profitable solutions. I would recommend researching the company and the strong framework that they have put together to acquire, prep, release and sell solutions.
The current framework put in place with assets can support revenues 2x what they are today without investing in more infrastructure. That means, they can double revenues with very little additional cost which will enhance profits. The company does not have any debt to pay so the proceeds can be invested in releasing more products. With returns on equity of over 30% the value of this company is tremendous and the momentum keeps building.
It sounds like the company is working on bringing other products from western Europe over to Canada, but no specific names were announced. I couldn’t get any specific names, but there are definite opportunities in discussion now.
Aguettant was recalled in the fall of last year due to some labeling issues (nothing to do with the product), and now the company is re-launching this product and sales will show up in Q2 with shipments going on now. This will be nice as the expenses of the recall were fairly large, and the company didn't have any revenue attributed to this product. It sounds like this recall is over, and now focus is on growing the Aguettant business.
CYSVIEW won't be recognizing any meaningful revenue until Q3 and the manufacturer is updating the sensors to support blue light and HD as opposed the inferior white light. This will help physicians detect potential cancer issues much easier as sensors are much better but has delayed the timeframe of launch from the initial plans.
The company does not have any plan to break out revenue's by product due to competitive reasons but the company did say that about 75% of the revenues are from the Fermax line. This is the first time that I have heard this breakout number by the company. Also, the Fermax products were stated to have about a 75-80% Gross Margin! Clearly the company has been riding the growth of Feramax which leaves plenty of growth opportunities for the existing products.
The strength of this company is in the commercialization platform that Biosyent has built, and the power of using this platform to launch more and more product. New drugs and products can be distributed through their existing businesses (Community Health, Hospitals and International) without adding more costs in order to support the business. This leads to high profit margins due to the operating leverage built into business.
Did you attend the conference? Any additional insights? Any questions for Ray? Please leave comments in the section below.