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Eguana Technologies (EGT.V)

Remember when Elon Music made the following announcement?

 

 

In case you don't want to watch this 22 minute video, this is Elon Musk announcing the Tesla Powerwall. The premise is; the world can get off coal and nuclear power by switching over to clean energy, using solar plus energy storage. We just need a solution: enter the Tesla Powerwall.

The idea was simple, have a giant home battery and use your excess solar power from the daytime for the nighttime. Or even better, have power controls that can shoot excess energy into the grid when demand exceeds supply (referred to as load balancing). 

The odd thing about this presentation was that Elon (in classic Elon form) was pretending this was his original invention, he even made light of how ridiculous current batteries look. In reality, the concept of the home battery was well established in Germany. 

 

Picture from Tesla Powerwall

After the Fukishma nuclear disaster, Germany determined that nuclear power was unsafe. They elected to shut down all nuclear programs, which created a giant rush to find new green energy solutions. A small startup company called Sonnenbatterie decided that using home batteries with solar energy would be an excellent solution for Germany and their new initiative. But in order to do so, they needed to find a company that could help them convert power from DC to AC and vice versa (refereed to as a bi-directional inverter) and a company that could provide a solution that would be considered grid friendly (approved by utility companies for grid hookup).

This is where our little buddy Eguana Technologies entered the picture. They were started by a Queen’s engineering graduate named Brent Harris who spent a great deal of time in Northern Alberta and chose to study microgrids (mini power grids for remote areas) and power solutions for remote areas. In 1999 he opened Sustainable Technologies with the two the Carten brothers, their focus was providing power control solutions for all types of energy storage. They went on to spend their first 15 years as a company creating great intellectual property, while tripping over their own feet producing power controls for the military and fuel cell applications.

In 2014, Sonnenbatterie was looking for someone to design the inverters and power controls for their home battery. Somehow this small little startup managed to sign an exclusive contract with Eguana.  This contract led to Eguana designing and integrating the technology that created the world’s first major home battery company (Sonnen installed over 5000 batteries with Eguana’s technology).

The first Sonnenbatterie

 

After two years of struggling with terrible margins and the exclusivity of the contract, Eguana and Sonnen parted ways. By this time, shareholders were frustrated. This frustration included one significant shareholder, a venture capital firm named Daughtery Hanson (owning over 25%). They chose to fire Michael Carten as CEO and elected to replace him with a supply chain specialist (recent hire presumably being groomed for the role), Justin Holland. The new direction for Eguana was simple: to become a major player in home energy storage as both a brand and a supplier. 

Imagine a 15 year old startup going from annual revenues of 6M (finally getting traction) down to nothing. You can imagine the impact this had on the stock price.

For the last two years, shareholders have patiently waited and supported Eguana’s revision. They would do three things:

1. Have their own home battery. This started out with an industrial unit in Hawaii which began installs in calendar Q4 (EGT Q1) of 2017.  Eguana was the first company to receive permission in the state to allow home owners to connect a PV system with energy storage to the grid. They are now connected with a top solar installer in a state where 1 in 9 homes have solar panels.

Eguana Hawaii Battery

And in January of 2018, they released a suspicious website displaying the new all-in-one unit that would be released in Germany. This is the first self branded Eguana battery. But more importantly it has features that sets it apart (remote diagnostics, pre-charge, etc) and allows it to be installed in under 2 hours; in a place where there are over 1M homes with PV systems.

Eguana All-in-One

2. Offer sub-assembly units. Similar to what they did before with Sonnenbatterie, except they are no longer exclusive to anyone. The big partner is presumably Dailmer, and a good guess is that they will be working on the vehicle-to-grid units:

MBE Vehicle to Grid

Eventually they could also be a part of Mercedes Benz all-in-one, currently offered as just a battery (find your own inverter), but one can assume that all-in-ones are an inevitable progression.

Also they have done some work for a startup with big aspirations out of Europe called Ampere Energy (started by the founders of UKs largest solar installer). They make home batteries that can go in your living room called "The Sphere":

Ampere Energy Sphere

3. Work with partners on commercial projects. Announced partners include Greenlots, Passons, and Bosch. Here is twitter confirmation they are helping EV charging station companies (presumably Greenlots):

Tweet

The key idea was: why have one customer when you can have many? They would attempt to latch onto every company they could and grow with them; reducing customer concentration and having more lottery tickets in a mega growth industry.  Home energy storage is just getting started and projects to be mega-growth moving forward:

growth

After 2 years of constant dilutions, a pretty big announcement came for those loyal shareholders. Eguana announced a multi-year contract with an unnamed German automanufactuer to provide power controls; increasing revenues 1700%. This contract is expected to generate 13M in its first year alone.  

Now combine that with the first mover advantage they have in Hawaii with e-gear solutions, and we can conservatively expect 2018CY revenues north of 20M.  This is where things get exciting, because the real prize is Germany; where home energy storage is expected to be a $1B industry by 2021. Eguana has a contract with the highly reputable Technologietransfer & Marketing GmbH ("Tt&M"). If EGT can grab 10% of this market place by 2021, that could generate $100M of annual revenues (at 5x sales that would get EGT a share price of approximately $2 on the Germany all-in-one alone).

Here is a quick summary of what I like about this company.

  1. They have years of research and leading technology in an industry that is more than likely to have extreme growth over the next decade.
  2. They have created the best/easiest solution for houses with PV systems (solar panels) to add an ESS.
  3. They have partnered with world class companies that normally wouldn't partner with a tiny microcap.
  4. The story is totally under the radar. One of the few YouTube videos where Brent Harris (founder/CTO) talks at length about EGT’s opportunity in Hawaii has 815 views (posted in 2016). This is one of the only videos where the company is mentioned on all of YouTube.
  5. Every raise gets oversubscribed. The last raise had a 70% employee participation.
  6. They are trying to grow with various partners in various verticals, thus eliminating concentration risk.
  7. The applications can extend well beyond Lithium Ion Batteries and Residential. They have partners in fuel cell, flow batteries, and even a company working with Salt Water Batteries.
  8. It appears they are supplying power controls for one of the world's most distinguished brands (Dailmer/Mercedes Benz).
  9. There are enough insiders w/DH to prevent a cheap takeover. I suspect Sonnenbatterie tried and they wouldn’t pull the trigger for anything south of an earth shattering price; which Sonnenbatterie didn’t have the funds for.
  10. We are at the front of the revenue ramp looking up. Expect over 1M sales in Q1/2018 and upwards from there.
  11. They don’t have an IR company, and they don’t promote the story. Insiders believe in this thing and are looking to get paid off the equity, not salary. The two top guys make 150k each, yet continue to buy at each raise. Justin owns over 3M shares w/ over 1M options.


I see many upcoming catalysts for Eguana technologies. Starting with last week, when they announced their deal with Dailmer (“German Auto Manufacturer”). Auto companies are terrified about the impact electric vehicles will have on the grid and will need companies with power control solutions to help work with utility companies to solve this. Secondly, I see the all-in-one roll out in Germany as just a start. Other countries will follow suit and we could see Eguana being a 10% player what will eventually be an industry exceeding over $20B a year globally.  I will conservatively estimate a target price of $3 by Dec 31, 2020.

iAnthus Capital (IAN.V)

 

Here is my latest investment:

iAnthus (IAN.v) operates best-in-class licensed cannabis facilities throughout the United States providing investors with diversified industry exposure. They own parts or all of facilities and dispensaries.

Here's a quote from CEO Hadley Ford that seemed relevant to me (I'm paraphrasing):

"If I told you that in the 1920s you could acquire 1 of 10 licenses to sell alcohol in the state of New York, you probably would have paid 18M then. That's what we are paying today for 1 of 10 Cannabis licenses in this state."

Currently they operate or will be operating:

7 Cultivation Facilities
4 Processing Facilities
15 Dispensaries (Expanding to 35, 20 of that is in Florida where they only have a 6% equity stake)

They have facilities in 5 states:

New York (Citiva - 100% ownership of 1 of 10 licenses in the state, owns one of two dispensaries in Brooklyn opening Q2 of 2018 and the only one in Staten Island)
Massachusetts (Mayflower Medicinal - 79% ownership in 1 of only 3 dispensaries in Boston, recreational sales expected to open up July 2018)
Florida (6.1% ownership of up to 25 dispensaries)
Vermont (Grassroots Vermont - 100% ownership)
New Mexico (Reynold Greenleaf - 25% ownership of one of market leaders)
Colorado (Organix - Own assets with market share leader in a popular ski town)

They did 688k revenue in their most recent quarter, have 13.4M long term debt and a cash position of 1.8M. The real revenues will start to kick in over the next 3 quarters when they start opening up dispensaries in Boston and New York.

The share structure is a follows:

Shares Outstanding: 44.2M
Warrants, Options, Convertibles -> 12.6N
Fully Diluted Shares Outstanding -> 56.8M

They feel that they will participate in 35 dispensaries in 2019, with at $10M per dispensary they could be at a 2019 revenue run rate of $99 million (multiply each dispensary by ownership %  and by 10M).  Let's assume that Cannabis companies end up at P/S of 10 at this point. That means with 57M shares fully diluted, we could expect a price of $18. Yes, that's $18 US dollars, for a stock trading at $3 Canadian. IMHO these numbers seem quite low. For example, I would expect the dispensary in Boston (1 of 3 in the entire city) or in Brooklyn (1 of 2 in the borough) to do well north of $10M. I’m also ignoring all the interest income they receive in the financings they do.

This is an all-star management team, they understand raising capital, manufacturing, taxes, and capital allocation. I suggest watching some of their investor presentations on YouTube.  According to the last circular CEO Hadley Ford owns 2.7M shares and paid himself a salary of 51k in 2016. We are perfectly aligned with management here.

What moves the needle? Opening of multiple dispensaries and cultivation facilities in New York and Massachusetts. Also, I can promise you Hadley is working on getting a footprint in California. I haven't spoken with him, but it would blow my mind if he doesn’t have a few dance partners lined up.

To sum up my investment thesis: IAN.v trades at a significant discount to Canadian LPs and U.S. competitors. It's completely silly to look at what some of these Canadian weed companies are trading at and how silly cheap you can get in on iAnthus for. My target price is $20 by the end of 2018. And based on relative valuations and what stocks are trading for in Canada, I don’t know if I would sell if this reached $20 because I think they are just getting started in terms of deal making.

 


Disclosure: Long

Photon Control Inc.

Photon Control Inc. designs and manufactures a range of optical sensors and instruments to measure temperature, pressure, position, and flow. These products are used by original equipment manufacturers (OEM), as well as in the semiconductor, oil and gas, power, life science, and manufacturing industries. It also provides engineering services for customized optical measurement systems. Photon Control’s products include Optical Sensors, Spectroscopy, and Downhole Pressure and Temperature Sensors. Its Optical Sensors include positioning, and temperature sensors systems, fast-response Immersion probes, Contact probes, and Life Science probes. Its spectrometers facilitate measurements in the ultra-violet, visible and near-infrared wavelengths, ranging from chemical composition and quantification to color measurement and radiometry. Its Downhole Pressure and Temperature Sensors are for measuring pressure and temperature over long distances and at high temperatures.

chart

I remember years ago watching Mad Money with Jim Cramer and hearing Jim say, "there is nothing investors love more than accelerating revenue." What is accelerating revenue? It is increasing revenue at an increasing rate. I took some time this Sunday to look at the revenue growth of Photon control and have compiled the following charts. Firstly, let's take a look at quarterly revenue growth (as my girlfriend pointed out to me, I have time moving in the leftward direction on all these, but you get the idea):

quarrev

Probably the most notable thing about the above chart, is that we are starting to see quarterly revenue reach new levels. Now let's take a look at quarter over quarter revenue growth:

revoverrevgrowth

The charts show that we are just beginning to see revenue growth,  thus probably making an investor think the trend might not be moving a favourable direction. However, things get interesting when we look at the sales order backlog:

salesbacklog

I think it's clear the chart above indicates that revenue is beginning to accelerate since the fourth quarter of last year. In the most recent MD&A, management of Photon Control attributes the increase in sales to "increased market activity." Thus, if the only reason, this kind of gets into a greater discussion over whether or not market activity will continue to grow. The company doesn't get into much further detail.

In each of the MD&A, the company breaks down where they do their business:

map

I can't get much further into detail about their products, because I simply don't have the information. But I will try to update this page as I find out more.

Here's a few quick notes about the balance sheet:

  •  Overall strengthening balance sheet: more cash and increasing equity.
  •  Current Ratio of 5.88
  •  No Long Term Debt
  •  Recently increased line of operating credit from 500k to 1 million.
  •  Tangible Book Value of 14.27 million.
  •  Appear to be running a pretty lean operation.
  •  Company is initiating a share buyback.

Based on what I do understand about the business model, I have identified the following risks:

  •  Sales Risk:
    •  Technology Risk (can they continue to develop strong products)
    •  Selling Risk (can they continue to expand and maintain their customer base)
  •  Exchange Rate Risk (not that signficant)

Recommendation

I am giving this stock a buy recommendation and I believe this stock will continue to increase in value and have a one year target price of $0.50. I am not overly confident in this stock, because it might just be entering another peak in what appears to be a cycle, but then again there could be a break out. It is hard to assess, because the company doesn't go into great detail over why revenue is increasing. The reason I am comfortable with this recommendation is there appears to be strong growth, with a strong balance sheet, and a low PE Ratio.

Why I don't Worry about a Crash

 

I took this chart from zerohedge, who I believe took it from  @Not_Jim_Cramer.

 

dowvsbernake

 

The general idea is that even if the markets tank, it will only be a matter of time until it gets brought back up by easy money. The majority of the experts I trust on the matter believe Yellen will be moreless the same as Bernake. Thus, if the markets tank, buy more, cause it will only come back. In short to medium term, the markets are only going up. The bubble is just getting started!

 

Do we have a stock market bubble arising?

 

I find evaluating stocks difficult right now. A part of me wants to be all in on what I deem reasonable valuations, but the other part of me is finding it hard to discover these. "I love the rally," says Simon Baker of Baker Avenue Asset Management, "I definitely think there's a bubble brewing, but you have to be long this market."

It makes you wonder, if the sentiment is turning towards markets only moving in one direction.  However, not everyone sees rainbows and unicorns in the stagflation utopia we have created. In a research note, Nomura Securities strategist Bob Janjuah is warning that over the final three quarters of next year and into 2015, there “could be a 25% to 50% sell off in global stock markets.”

Mr. Janjuah says  “The major themes are unchanged–anaemic global growth/mediocre fundamentals, what I consider to be extraordinarily and dangerously loose monetary policy settings, very poor global demographics, excessive debt, an enormous misallocation of capital driven by the state sponsored mispricing of money/capital, and excessive financial market/asset price speculation at the expense of any benefit to the real economy."

Where Mr. Janjuah sees the economy collapsing is a much delayed rebalancing of the global economy as central banks pull back from all of their aggressive stimulus activities.

This is where economics get fuzzy. How does he forecast central banks pulling back stimulus? What models is he using? And what are the assumptions in those models? Or is he simply guessing?

Those of you who have been reading my blog over the years probably know that I don't see it ending. I believe the central-banking-powers-that-be have positioned themselves in such a way that the best possible outcome moving forward is stagflation.  I believe there is no pulling back, let alone an exit strategy.

However, if Mr. Janjuah's prediction were to come true, I would welcome it. I love the notion of a market tank, with great tanks come great opportunities.

MeetMe Inc.

 

MeetMe, Inc. (MeetMe) is a social network for meeting new people in the United States and the public market for social discovery. MeetMe makes meeting new people fun through social games and apps, monetized by both advertising and virtual currency. The Company has 60% customers coming from mobile. MeetMe is the social gathering place for the mobile generation. The Company operates MeetMe.com and MeetMe apps on iPhone, iPad, and android in English, Spanish and Portuguese. The Company provides advertising facilities through MeetMe Ads and Social Theater. MeetMe Ads had over two billion page views monthly, over 78 million registered users across the world and approximately 50% of activity on mobile, as of November 17, 2012. Social Theater consists of traditional marketing and social networking.

 

A look at Bob Auer from the Auer Growth Fund

Last night I listened to an interview from microcapclub.com, with a man named Bob Auer. Bob is a portfolio manager for a fund he started back in 2008. He managed to make millions of dollars off a philosophy he discovered with his father, they search for three things:

  1. Stocks with quarter over quarter sales growth above 25 percent
  2. Stocks with year over year sales growth above 25 percent
  3. Stocks with a PE Ratio under 12

In the interview, Bob describes the philosophy as, "we are buying the Apple and Google type growth stocks, but only paying a reasonable valuation." He said over a 21 year period following that criteria they found over 800 stocks that doubled. The sell discipline of the portfolio is if they quit having a 25 percent quarter over quarter growth or the stocks doubles they sell.

My Sad Thesis on Minimum Wage

 

We are seeing a growing trend towards the public demanding an increase in minimum wage. Last weekend on Real Time with Bill Maher, Bill mentioned how the median fast food worker in America makes $8.65 per hour and is 29 years old.  In reference to Ronald McDonald he said "until he starts paying his employees a living wage, he has to wipe that f--ing smile off his face."

 

Counsel Corporation

 

Counsel Corporation is a financial services company operating in residential mortgage lending through its wholly owned subsidiary Street Capital Financial Corporation (Street Capital), which is a non-bank mortgage lenders in Canada. The Company operates in one reportable segment, which is mortgage lending. The Company sells the mortgages that it underwrites to financial institutions. The Company sources its mortgages solely through a network of independent, mortgage brokers with whom it has built relationships.

 

cxschart

 

Recently a mortgage broker told me about the things going on at Counsel Corporation and I was intrigued. Naturally whenever someone tells me about a small cap stock with extreme growth I am going to pull out my phone and look at the numbers. This company is certainly worth a look, as an analyst from Industrial Alliance Securities put it back in June, “this should be a four or five bagger."

 

Current Recommendations

Currently Smallcapsteve is recommending the following stocks:

  • iAnthus (suggested @ $3.30)
  • Photon Control (suggest @ $0.30)
  • Eguana Technologies (suggested @ $0.34)
  • Questor Technologies
  • Spot Coffee
  • Valeura Energy

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