KeyStone’s Your Stock Our Take: Crescita Therapeutics Inc. (CTX:TSX), STAR: XEBEC Adsorption Inc. (XBC:TSX-V) and DOG: Harte Gold Corp. (HRT:TSX).
This week in our Your Stock, Our Take segment we answer a listener question on Crescita Therapeutics Inc. (CTX:TSX), commercial dermatology company with a portfolio of non-prescription skincare products and prescription drug products for the treatment and care of skin conditions and diseases and their symptoms. A listener asks us if the recent huge jump in profitability makes the stock attractive.
Our Star of the Week is XEBEC Adsorption Inc. (XBC:TSX-V), a provider of clean energy solutions – specifically gas generation, purification and filtration solutions for the industrial, energy and renewables marketplace. The stock was up 18.75% last week and has surged 185% year-to-date.
Our Dog of the Week is, Harte Gold Corp. (HRT:TSX), is an Ontario-based, gold producer through its wholly owned Sugar Zone Mine in White River Ontario. The company is down 20% in the last 2 trading days and 56% in the last 12-months in a supportive gold pricing environment. We discuss what ails the stock.
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Your Stock, Our Take
Crescita Therapeutics Inc. (CTX:TSX)
Current Price: $0.98
Market Cap: $20.6 million
What does the company do?
Crescita is a commercial dermatology company with a portfolio of non-prescription skincare products and prescription drug products for the treatment and care of skin conditions and diseases and their symptoms.
Key Points:
Crescita has been a strong performer over the last year with the stock price more than doubling. The share price hit a high of $1.12 in July and since then we’ve seen fairly significant volatility.
The company released its Q2 financial results on August 8th which at face value looked to be very positive. There is a net cash balance of $6.5 million, about $0.32 per share.
In April, Crescita announced an out-licencing agreement with a company called Cantabria Labs, a leading prescription dermatology company in Europe. This agreement gives Cantabria Labs the exclusive rights to sell and distribute the Crescita’ product Pliaglis in Italy, Portugal, France and Spain. The agreement also involved significant up-front payments made to Crescita.
On October 28th, Sundial Growers (SNDL:NASDAQ) and Crescita signed an exclusive partnership to develop cannabis and hemp topicals, connecting Crescita’s commercial dermatology operations with the cannabis industry.
Recent Quarterly Financials (August 8th):
- Revenue for the second quarter ended June 30, 2019 was $9.4 million, an increase of 305% over the prior year period.
- Net Income grew to $2.2 million in the second quarter of 2019, compared to a loss of $661,000 in the prior year period.
- Adjusted Earnings were $4.8 million compared to a loss of $1.4 million previously.
- Adjusted EPS increased to $0.21 from a loss of $0.07.
- Adjusted EBITDA was $5.4 million in the second quarter of 2019, compared to $1.9 million in the second quarter of 2018, up 176%.
- Q2-2019 revenue included $5.5 million in up-front payments and guaranteed future minimum royalties, both related to the out-licensing agreement with Cantabria Labs.
- Removing these upfront payments puts the company in a net loss position for Q2.
Our Take:
Current Ratio: 4.11
Cash Ratio: 2.43
Net Cash: $6.5 million
Net Cash/EBITDA: 0.74
Crescita has had a very strong year of performance with the share price more than doubling over the last 12 months. The company’s Q2 report appears to be strong but when we remove the $5.5 million in up-front payments, the result is a net loss for the quarter. It does appear that these up-front payments will not be part of recurring revenue so the future profitability of Crescita is far from certain. As well, the company’s most recent licensing agreement in the Cannabis sector doesn’t come with any concrete numbers to analyze. Crescita is a very interesting company and we love to see the net cash position which reduces financial risk and provides great flexibility to invest in the business or pursue acquisitions. KeyStone would need to dig much deeper into this company and talk to management before considering a recommendation.
Weekly Star
Xebec Adsorption Inc. (XBC:TSX-V)
Current Price: $2.05
Market Cap: $149.868 Million
Star Performance:
The stock was up 18.75% last week and up over 185% year-to-date, from where it was trading around $0.70 to $2.05.
What does the company do?
Xebec specializes in compressed air and gas systems, developing products and technology solutions for environmentally responsible generation, purification, dehydration, separation, and filtration applications. The company operates internationally with a presence in North America, Europe and China.
Xebec is trying to increase its focus on renewable gas generation, as it believes that these fuel sources are increasing in demand while the world takes action on climate change.
Some of its products include:
- Systems and equipment to convert Biogas to Renewable Natural Gas (RNG) from agricultural digesters, landfill sites and wastewater treatment plants (WWTP)
- Systems for renewable Hydrogen generation from Renewable Natural Gas
- Gas Processing Systems for removal of CO2 from Natural Gas
What is driving the stock?
On September 11, 2019, the company announced over $11.7 million in new orders which increased the companies backlog from $63.5 million to $72.2 million as of September 6th, 2019.
In addition, the company’s most recent quarterly results appear to show that operations are improving with significant revenue growth and work towards consistent profitability – which I will touch on further in a second.
But I also wanted to point out that the increase in share price may also be influenced by interest surrounding clean energy. As right now, climate change is one of the main macroeconomic drivers for adoption of renewable, zero-carbon energy such as renewable natural gas. (RNG) and XEBEC is touting itself as a clean energy company.
Financial Results
Q2, 2019
- Revenue increased 140%, to $12.77 million, from $5.32 million in the same quarter last year.
- EBITDA increased 500% to $1.8 million compared to $300 thousand for the same quarter last year.
- Net Income was up substantially to $1.02 million from a loss of $113 thousand for the same quarter last year.
Conclusion:
Looking at the twelve trailing month figures, revenue has doubled period over period and EBITDA & Net Income has also increased substantially.
Management has provided fiscal 2019 guidance of $45 million in revenue, $4-5 million in net earnings and $6-7 million in EBITDA. Which the company has stated it is currently on track to meet these figures.
Looking at the company’s valuation multiples based on management’s fiscal 2019 guidance. The stock is currently trading at a forward P/E of around 24 times and its forward EV/EBITDA multiple is trading around 22 times. Both of these multiples appear to be a valuing the company at a moderate premium to the market but considering the company’s impressive growth does not appear to price the company at unreasonably high levels.
Taking a look at Xebec’s balance sheet, at first glance the company does appear to be highly levered with a debt-to-equity ratio of 1.78. But now that the company has broken into profitability, assuming this continues, the shareholders equity should continue to grow making the D/E more reasonable.
Also considering the company’s debt, Xebec has a net-debt-to-EBITDA ratio of under 1, again indicating that the company’s debt is not unreasonably high.
Now to conclude, there is definitely some enthusiasm behind the story as the company has been growing revenue quite rapidly, has recently broke into profitability and appears to have a balance sheet that is beginning to strengthen. The macroeconomic environment also appears to position the company positively as the world tries to move away from fossil fuels.
Xebec definitely checks a lot of boxes in meeting our investment criteria, but at this time we will continue to dig deeper.
But all in all, the recent increase in backlog, overall financial performance and attractive macro factors have caused the share price to appreciate and has allowed the company to claim the coveted status of our Star of the Week.
Weekly Dog
Harte Gold Corp. (HRT:TSX)
Current Price: $0.18
Market Cap: $676.9 million
Dog Performance:
The stock is down 28% in the last month, and down 56% in the last 12 months.
What does the company do?
Harte Gold Corp is engaged in the acquisition and exploration of mineral resource properties. It is focused on gold properties located in the province of Ontario, Canada. The company’s exploration projects consist of sugar zone property and Stoughton Abitibi property. The Sugar zone property is located approximately 80 kilometers east of the Hemlo gold camp on the north shore of Lake Superior. It includes approximately 4 mining leases and 336 unpatented mining claims. In addition, it also consists of approximately 29,435 hectares within the Sault Ste. The Stoughton Abitibi property is located approximately 110 kilometers east of Timmins and 50 kilometers northeast of Kirkland Lake.
What is driving the stock?
On Friday evening, the company released its third quarter update and guidance for 2019, resulting in approximate 20% drop in the stock this past Monday. The update showcased a significant downgrade in guidance, down to 24,000 ounces from 39,000 ounces. Additionally, quarterly results were below target. This is due to issues around mine development and stope production arising from start-up delays of the paste fill plant and lower than planned development rates.
Financial Results (August 14)
Q2 2019 compared to Q2 2018
- Revenue was $11.8 million compared to $0 previously.
- Net loss was $25.9 million compared to $7.1 million previously.
- On a diluted per share basis, a loss of $0.043 compared to a loss of $0.012.
- Adjusted loss was $6.8 million compared to $6.9 million previously.
- On a diluted per share basis, a loss of $0.011 compared to a loss of $0.012.
- Adjusted EBITDA of $145,175 compared to a loss of $6,954,854.
Conclusion:
Negative TTM Earnings
Negative TTM EBITDA
Current Ratio: 0.52
Net Debt: $89.7 million
Negative Shareholders’ Equity (Total Liabilities are 102% of Total Assets)
Harte Gold, while revenue positive, continues to produce negative cash flow and negative EBITDA. The company has significant net debt and slightly negative shareholders’ equity. The recent drop in the share price share price followed the company announced it would miss its third quarter production guidance and is significantly downgrading 2019 production guidance. One bright note is that the company reported positive revenues this year, compared to no revenues in the previous year. However, the negative earnings, poor relative balance sheet, downgraded guidance, and share price losses make Harte our Dog of the Week.
