Q4 Prelim: Story has Turned – Cashflow Cashflow Cashflow...Will hit this one quick post Q4 preliminary numbers that came out last week and once again they blew out my estimates. This time I thought I was being a little more aggressive but they go blow them out again. Big difference this time is the underlying core profitability of the platform. It caught me by surprise.
Lets Dig in;
Revenue $864,000 Revenue – More impressive than the revenue number is the gross margin figure now that the credit services part of the business is no longer included in the revenue figure.
Gross margin has gone from -3.98% up to 94.44% in only 5 quarters… Are you kidding me. (Q4 FY19 94.44%, Q3 FY19 86.83%, Q2 FY19 49.35%, Q1 FY19 58.21%, Q4FY18 33.18%, Q3 FY18 -3.98%). Now that the Tourbuzz business is fully integrated and the business is in much better position they can focus and turn their attention back to growing the business organically. Which was specifically brought up with new customers signing on board the first Quebec based Tourbuzz clients that will bring in apox. $60,000 in revenue.
As well, getting into Australia in a much bigger way, wouldn’t be surprised if we here more about this going forward.
Profitability & Cashflow $407,000 Operating Cashflow – This is the part that is just amazing in my opinion. I knew these platform-based businesses were highly profitable but this figure equates to a revenue conversion into operating cashflow or EBITDA of 47%. I would challenge you to find a business with a higher cash operating margin.
You might be looking a long time if you try... Couple things to point out here; - Trailing 6 month Operating Cashflow of $826,000 and if you add to this figure the further $200,000 operating efficiencies management has guided that it can further take out of the business in FY20 that is close to $1,000,000 in operating cashflow in their key seasonally strong quarters.
- Business can now be cashflow positive in winter Qs. This new lean operating model has brought down the breakeven figure of GMV down to aprox. $1M/Quarter. Assuming a 35% conversion ratio on GMV into revenue with 95% Gross Margin and a $250 – 350k in cash OpEx on a quarterly basis they will not face the same cashburn like last winter.
Balance Sheet Restructure This is the first time I can look at this business and in good faith I can confidently say there is a way out from under the leverage on the balance sheet without having to dilute it all away. As a result, I have taken down my out year share count estimate from 100,000,000 shares down to 80,000,000.
Would a partial equity raise be the end of the world –
no. As now they can at least negotiate from a position of strength given the underlying cashflow they are producing. You are already seeing it with the announced US debt refi announcement.
This refi will save them apox. $210,000 in annual interest costs and at a rate of 7.45% there are very few microcap companies currently being able to obtain <10% financing. Trust me on this one, its been a battle on several names I am invested in… It is a strong vote of confidence from the lender. After this debt refi the balance sheet is in a great place. This leaves them no principal payments due till July 2022. This gives them three years to invest and grow the business without the barreling capital restrictions of principal debt payments.
With the business on my estimates going to generate $1,500,000 in annual cashflow starting in FY2020 this leaves them 3 year to generate cash and grow and scale the business. So, as we look 2 – 3 years out when the debt comes due this business has the ability to continue to grow into a cashflow monster and should have no problem refinancing or even paying back a large portion of the convertible debenture or the newly financed bank loan.
Keep in mind – The convertible debenture is convertible into equity 0.125/share… I have a fair value of the business of aprox. 0.12 – 0.15/share on FY2020 numbers. You get the stock moving up to what I see as fair value and you even get a partial conversion of that debenture and a lot of those balance sheet concerns disappear in a hurry. Especially if you start looking at what this business could be in 2 -3 years as it adds on to its existing business services offerings. In Conclusion, the fundamental operating performance of the business has blown any expectations people could have had going into the summer and its time for the underlying stock price to play catch-up. There was little to no value being placed on the equity of the business but given the surge in operating profitability and the ability to refinance short obligations I believe more and more value should be shifted to the equity holders from the convertible debenture holders of the business which should result in a higher stock price.
LONG – Added last week at 0.07/share