KeyStone’s Stock Talk Show, Episode 190

Great to be back with you this week. We will start by covering last week’s Bank of Canada rate hike and how the US housing market has reacted near-term to sharp rate increases. In our YSOT segment we take viewer questions on four stocks. This first, Vitalhub Corp. (VHI:TSX), a growing Canadian Small-Cap software consolidator focused on the healthcare vertical. Its primary products include electronic medical records (EMR) and patient flow solutions. The business is cash rich and has posted strong revenue growth but the stock is down 26% year-to-date. The second company, Mullen Group Ltd. (MTL:TSX), is one of North America’s largest logistics providers. A client who currently owns this stock and has done well with it including the dividend asks if we consider it a long term holding. Our thirds YSOT is on, Drone Delivery Canada Corp. (FLT:TSX-V), which designs, develops, and implements a commercial drone-based logistics platform in Canada and internationally. The client states that Drone remains speculative but has some serious agreements with Air Canada and other companies for commercial deliveries. Brennan takes a look at the stock. Our fourth and final YSOT is on Plurilock Security (PLUR:TSX-V), an identity-centric cybersecurity company that reduces or eliminates the need for passwords by measuring the pace, rhythm, and cadence of a user’s keystrokes to confirm their identity. Brett takes a look at this growing micro-cap which is down 69% year to date.

I welcome my cohosts – Aaron, and the Killer B’s – Brennan and Brett.

More Rate Hikes in Canada:

Bank of Canada Governor Tiff Macklem made an end of the year speech this Monday afternoon.

The remarks come after the central bank hiked its key interest rate by half a percentage point on Wednesday, bringing it to 4.25 per cent – the highest it’s been since January 2008.

Since March, the Bank of Canada has hiked its key interest rate seven consecutive times in an effort to bring inflation down and slow the economy.

The central bank signaled last week that it might be ready to pause its aggressive rate hike cycle but Canadians should not expect rates to start going back down any time soon.

After peaking at 8.1 per cent in July, Canada’s annual inflation rate has slowed to 6.9% in October _ still well above the Bank of Canada’s target rate of two per cent.

Macklem’s speech will take place in Vancouver and will be hosted by the Business Council of British Columbia.

Vitalhub Corp. (VHI:TSX)

Price: $2.45

Market Cap: $106.16 Million

Yield: n/a

Company Description: VitalHub Corp. is a software consolidator focused on the healthcare vertical. Its primary products include electronic medical records (EMR) and patient flow solutions. VitalHub has >400 clients and is based in Toronto, Canada.

Q3 2022 Results

  • Revenue of $9.78 million, an increase of $3.16 million or 48% from the comparative period in the prior year.
  • Organic Annual Recurring Revenue Bookings were $851,000, growing 2.7% sequentially despite summer seasonality. However, the weaker British Pound hit ARR by $1.1 million – the quarter was recorded during the peak of the UK budget crisis.
  • Adjusted EBITDA was $2.15 million, or 22% of revenue, compared to $1.28 million or 19% of revenue in the comparative period in the prior year.
  • Net income was basically break even at $40,000 up from a loss of $575,000 in Q3 2021.

Balance Sheet: Vitalhub has a strong balance sheet, but it is not all from internally generated cash flow, the company continues to issue shares to fund growth. Cash on hand at September 30, 2022 was $36.07 million compared to $16.39 million as at December 31, 2021, against loans payable of just under $9 million for a net cash position in the range of $25 million to execute on acquisition initiatives.

Acquisitions: Subsequent to the quarter end, the company acquired all of the issued and outstanding shares of QWAD Community Technologies, which operates in Australia. The company offers an online case management system and supporting products serving 350+ agencies located in all states and internal territories of Australia. Vitalhub paid CAD $7.11 million.

Valuation: The company trades at a price-to-earnings ratio of based on 2022 expected earnings of 48 which is expected to drop to approximately 18.5 on 2023 expected earnings (keep in mind EPS missed expectations in the last quarter but has improved in 2022), and price-to-free cash flow based on 2022 expected numbers is 9.4x (more favourable).

Our Take:

Vitalhub has shown strong revenue growth, primarily from acquisition with a reasonable amount of organic growth sprinkled in since 2017 when it posted just $1.1 million in revenues to today’s trailing twelve month figure of $35.5 million. Operating income has improved from a loss of $2.1 million to a profit of $3.5 million over the past year. However, for a company with an enterprise value in the range of $79 million, this still leaves the company trading at 22.5 times this figure. Reported EV/EBITDA is in the range of 14.8 but on an adjusted basis for 2022 it is closer to 8.4. According to analysts estimates VitalHub is trading at 6.3x C23 EBITDA vs. its more mature software consolidators at 14.2x. The goal of management is to drive margins higher with further organic growth/cost reductions and demonstrates its ability to compound FCF/sh., If the company can do so and post higher per share FCF, it’s multiple could re-rate higher – but management has to execute. We are awaiting execution on higher per share cash flow growth.

Your Stock Our Take

 

Peter – “Can you look at Drone Deliver Canada? Speculative for sure but serious agreements with Air Canada and other companies for commercial deliveries. No net profit yet.”

—————–

Drone Delivery Canada Corp. (FLT:TSX-V)

Price: $0.28

Market Cap: $62.8 Million.

Company Description:

Drone Delivery Canada Corp. designs, develops, and implements a commercial drone-based logistics platform in Canada and internationally. The company’s logistics infrastructure solution is an integrated turnkey logistics platform, which include industrial-grade drones, automated DroneSpot depots, automated battery management systems, a detect and avoid radar system, and proprietary FLYTE software to integrate various components into a solution.

Key Points:

The stock is down about 64% YTD and is down 90% from its 2021 highs.

The company has a couple of drones which are operational and is currently developing additional  drones, including, the Condor, a two-stroke gasoline helicopter which has a maximum payload of 180 kg, a range of 200 km. The company now anticipates completing endurance testing in 2023 in Foremost Alberta. The company is also working on the Canary (which is the next generation Sparrow).

Slide 2 – DDC signed some interesting contracts in 2022 (None of the contracts have publicly listed dollar values on them):

  • November 7, 2022, its Care By Air project initiative, through the assistance of its sales agent Air Canada, with Halton Healthcare Services and DSV Air & Sea Inc. This revenue generating pilot project will be operational for a 6-month term and will be used to transport a wide variety of healthcare goods by cargo drones for the benefit of fast and efficient delivery to Oakville Trafalgar Memorial Hospital.
  • On August 4, 2022, it announced the successful approval and implementation of dangerous goods transportation for the University of British Columbia (UBC) Faculty of Medicine’s ‘Remote Communities Drone Transport Initiative’. Which is utilizing the company’s drone logistics solution to enable a defined two-way delivery flight route to transport a variety of cargo to Central Northern B.C. (Expected to last about a year)
  • June 2, 2022, its Edmonton International Airport initiative became commercially operational. This revenue generating project will be operational for a 12-month term. The solution will be used to transport a wide variety of cargo for the benefit of Ziing Final Mile and Apple Express, located in the industrial park in Leduc County, Alberta.
  • In April 2022, the company entered into a collaboration agreement with Bell Mobility Inc., to work together for a three-year term in respect of development of certain products and services in order to improve technology as it relates to 5G network and multi-access edge computing for autonomous drone performance.

Slide 3 – Financial Results Q3 2022:

The company just reported its Fiscal Q3 2022 results on November 15, 2022:

  • Revenue was up substantially to $247K from a small base.
    • The increase in revenue was due to the inclusion of the UBC and EIA contracts that went operational. Plus, the company recorded revenue from the provision of engineering services to Bell Mobility Inc.
  • Net loss was $(3.8M) up from a loss of $(3.3M) in Q3 2021.
  • Cash flow used in operations was $(2.6M), up from a loss of $(2.0M) in the prior year period.
  • Balance sheet had cash of $18.2 million and no debt. The company’s share count is getting up there though, now with 224 million shares outstanding.
 Q3 22Q2 22Q1 22Q4 21Q3 21Q2 21Q1 21Q4 20
Revenue$247K$199K$142K$115K$6K$19K$195K$203K
Net Loss $(3.8M)$(3.4M)$(3.6M)$(3.1M)$(3.3M)$(3.9M)$(4.4M)$(3.4M)
Net Loss Per Share$(0.02)$(0.02)$(0.02)$(0.02)$(0.02)$(0.02)$(0.02)$(0.02)

CONCLUSION

Drone Delivery Canada is an interesting company, and one day it could be the leading provider of delivery drones in Canada. But I agree with Peter, it remains speculative given its very small base of revenue and continual losses which have amounted to over $(28.9)M over the last 8 quarters. The company does have some good partners including Air Canada, UBC, and Bell, but these partnerships haven’t translated into meaningful revenue. And though the business has a cash rich balance sheet, it will have to continue to invest heavily in R&D to advance its drone technologies and if it doesn’t achieve profitability soon, it will likely have to further dilute shareholders. Again, it’s an interesting company but until the company can start to produce meaningful revenue and get closer to net profit and positive cash flow, we would remain on the sidelines.

Your Stock Our Take Plurilock Sercurity (PLUR:TSXV)

Question from Randy,

Plurilock Security Symbol PLUR on the TSX Venture. Plurilock Security Inc is an identity-centric cybersecurity company that reduces or eliminates the need for passwords by measuring the pace, rhythm, and cadence of a user’s keystrokes to confirm their identity. They operate in highly regulated industries, including Healthcare, Critical Infrastructure, Government & Defence, and Financial Services. Recently, on November 9th, Plurilock consolidated all of its software solutions.

The stock is currently trading at $0.14 a share and a market cap of $10 million, down 69% Year to date.

The company had a massive increase in revenue of 103% year over year to a record $30.8 million.

The revenue for Plurilock is extremely inconsistent due to the contract nature of the service. The company’s hardware sales dominate revenue makeup at 82.4%, while software only made up 17.3%. As hardware is more often one-off, it explains the high variance in revenue.

Net Income still came in at a loss of 1.6 million for the quarter, slightly worse than the previous year’s loss of 1.4 million.

The company is burning through cash, the last quarter was only an operating decrease in cash of 87 thousand, but year to date, the company has used 6.2 million. Further hurting the company’s cash balance is it has been actively acquiring companies, spending $3.9 million year to date

This leads us to the balance sheet, its not great. The company has a net debt positive of $1.1 million. Which on its own isn’t detrimental to the company, but it has net negative working capital as well. The company has $28.3 million current assets versus 31.1 million in current liabilities, resulting in net negative working capital of $2.8 million. Some of what is included in the liabilities is share compensation of $1.6 million, but even adjusting for that working capital is negative $1.2 million.

The company has an active line of credit. Following the acquisition of Atrion Communications, Plurilock increased its credit limit to $4 million US from $2 million US, on September 26th, right before quarter’s end so it is likely next quarter will see an increase in amount drawn upwards of double.

If the company were to draw the full $4 million US it would be just over $5 million Canadian; for size comparison, this is roughly half the market capitalization of the company.  As the company is not cash flow positive, it could result in further dilution of shares to pay off the interest on the line of credit.

For its various acquisitions, share compensation and general issuance to raise cash plurilock has increased its basic share count 6% to 74 million, it has additionally issued warrants and options.  The company has 9.9 million options and 7.5 million warrants outstanding, but at this time all are out of the money, meaning they won’t be executed.

In summary, the revenue is growing albeit inconsistently, the company produces no profit or operating cash flows, and increasingly leveraging its balance sheet. This is not a company we would invest in.



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