The MicroCap Malaise – Recognizing & Taking Action…Bare with me the next thousand words or so if you have care about capital markets. The hallowing out of support in the micro/small cap space following the weed and crypto bonanza has ignore & created some of the greatest opportunities in the last couple years. Wouldn’t know that looking at the broader indexes hitting all time highs.
I should disclosure, I am going to talk names I am familiar with, but the broader theme is applicable across the entire space.
The complete lack of support for these emerging growth businesses that are generating significant revenue and EBITDA growth that are getting no support from the broader investment community whether you look at 1. Liquidity 2. support in financing efforts 3. discount they trade at to the larger market cap peers with lesser growth rates.
This is a dangerous trend and it is at the tipping point, where these great businesses are at risk of slowing growth plans because they cant get support from the market and its raises their cost of capital and acts as a regulator on growth for some of the most disruptive businesses.
The innovative entrepreneurs that are going after massive TAMs while the corporate financing structure has bailed on them for weed is rather disappointing, but I get it they are chasing dollars but it has left many great companies behind.
I am not talking about high spec companies here, I am talking about real businesses that are generating a growing recurring stream of operating cashflow.
I feel obligated to do my part because I solely play in this space and I stare into the madness everyday and these individuals and businesses need our support. Let me highlight three of them.
Nova Leap Health Corporation – NLH.v
Valuation Gap
NLH.v – 0.6x Sales w 100% growth & 6x EBITDA (normalized 10% EBITDA margin) – OPERATING CASHFLOW POSITIVE
RELATIVE TO…
AMED (Amedisys Inc.) – 2.0x Sales w 20% growth & 19x EBITDA
IMPACT: Trades at 3/10 of the valuation with 5x the growth rate. How is this possible, where is the support.
Capital Market Support
NLH – was growing effectively both organically and through acquisition. In 2017 & 2018 they were effectively able to raise both equity & debt capital.
Problem is now as the share price has lagged every person that bought into the last 2 financings are under water and they are bringing in no more cash through warrants exercise other than insiders that continue to support the stock.
They would be hard pressed to get support from the equity market to do another raise and if they would it would be highly dilutive. Even though every acquisition they have done so far has been integrated effectively and has been accretive.
IMPACT: acquisition program might have to slow as they will be completely reliant on debt financing and the balance sheet can only be levered up so far.
Liquidity
Average Daily Volume – 50,000 shares or $13,500 at today’s share price. Peanuts.
Urbanimmersive – UI.v
Valuation Gap
UI.v – 0.7x Sales w 140% growth & 4x EBITDA – OPERATING CASHFLOW POSITIVE
RELATIVE TO…
Software as a Service 3.5 – 4.0x Sales
IMPACT: Trades 1/5 of the valuation with triple digit growth rate. How is this possible, where is the support.
Capital Market Support
UI – swung big and closed and integrated a large acquisition to become the leader in the photography CRM space with the acquisition of Tourbuzz and the fruit is starting to bear with operating cashflow and record revenue.
Problem is now as the share price has lagged and converts are way out of the money and the balance sheet needs to be cleaned up and the last raise was done with converts in the 0.10 – 0.125 level or 100% higher. Even though all they have done is execute.
They have lost the support of the equity market and any raise would be highly dilutive, where is the supports for a growing CRM SaaS company when companies on the NASDAQ with comparable margin profiles are going public 10 – 20x Sales with lesser growth rates and private companies in the same space are raising $230M in France
When did the Canadian microcap space become so toxic…
IMPACT: They will have to now barter a hard deal on the bank financing side given the interest rate environment it’s a good time to be negotiating. There will come a day though whether it be a convert or warrants attached to debt that will be more dilutive than it would need to be.
Liquidity
Average Daily Volume – 115,000 shares or $6,325 at today’s share price. Peanuts.
Renoworks Inc. – RW.v
I picked RW.V here but I could also have gone with a URL.ca (had to refi debt at a 11% rate) or a BEW.V (got bullied into a highly dilutive equity raise and couldn’t get debt financing without highly restrictive/dilutive terms)
Valuation Gap
RW.V – 2.0x Sales w 30% growth – OPERATING CASHFLOW POSITIVE
RELATIVE TO…
Software as a Service 3.5 – 4.0x Sales
IMPACT: Trades 1/2 of the valuation with 75% gross margins. How is this possible, where is the support.
Capital Market Support
RW – recently signed a key partnership with Gemoni a VRSK company a $24B dollar market cap company to roll out their AI solution FastTrack and as a result looked to raise $1M to expand operations and talent acquisition.
They offered the shares at over a 10% discount with a half warrant attached and what happened, liquidity dried up and they were unable to raise the funds.
When private companies south of the border continue to raise $10s of millions with ease.
As a result, they had to lower the offering amount and price…
IMPACT: Not being able to raise the whole amount will have to slow their launch of their new product and flattens their growth trajectory at a more dilutive rate.
Liquidity
Average Daily Volume – 28,000 shares or $8,400 at today’s share price. Peanuts.
In summation, all three I just highlighted are all cashflow positive and currently need the support from capital markets to help fund their next leg of growth.
There is value here, especially on the tech side. This is proven by the strategic relationships these companies have signed and work with when it comes to multi billion dollar industry Giants;
Renoworks & Verisk - $24B US Tech Company
Urbanimmersive & Zillow - $10B US Housing/Tech Company
BeWhere & Bell - $54B Canadian Telco Company
These companies are going to get taken out at deeply depressed valuations if we don’t give them support. How can these multi billion dollars companies see value and work with these micro caps and help them build but they cannot get support from the broader investment community with any valuation multiple…
The danger is not that these companies get taken out for some of them it would end up quite well for me, the bigger industry problem is if these companies are no longer going to be supported they will look to stay private longer and longer and may never go public and if they do, will be less competitive as their cost of capital will be higher.
As a small home gamer getting access to these early stage growth companies gives you the ability to get in the ground floor and share in the wealth creation as these businesses hit the inflection point of critical mass and scale.
We cant give up on these entrepreneurs in our backyard that are putting there money on the line (UI.v & NLH.v both with insider buying) or else they will stop looking to come public.
Lets’ not limit wealth creation to the big venture funds and intuitional investors let the home gamer still have a shot if they do their homework.
I will never have the capital base/expertise/connections to start a disruptive company, but the capital markets give me access to these businesses and effective management teams and individuals.
I am just a factory worker with an accounting degree I don’t use… as the balance between labour & capital shifts further towards capital we need to continue to have access to these opportunities and support these people and the companies they operate.
BUY A MICRO/SMALL CAP NAME TODAY.
Long (BEW NLH UI URL)