Two previous decent reviews for this one, including a 3 star back in May, but the market has not concurred. Let's see if anything has changed with their second quarter:
Balance Sheet:
Current ratio of 1.2 (ok and similar to Q1), but with only $1.26M in cash, a whopping $34.1M in receivables over $38.3M in current liabilities. I mentioned my concerns with their accounts receivables for two straight reviews which now dates back over 10 months from my initial review, and this number just continues to balloon. Since November of last year, their A/R has grown from $25M, to $28.4M in May, to the $34M where it sits today.
The company does not provide any aging of their receivables that I could find. All that is stated is in note 4 that A/R "are collectible within a short period". I'd certainly like them to define short. If we look back to their July 2021 acquisition of Global HVAC, that deal included $27.7M worth of receivables (image), so one has to wonder how much of that is outstanding, and if it is significant, then I would have some concerns.
On the flip side is the growing payables, which become more difficult to deal with if you can't collect on your own A/R. $4.9M in long term contingencies from acquisitions.
Post financials entered into a $20M credit facility, and sounds like they have drawn $6M on it immediately.
Cash Flows:
High operational burn rate on paper, but this is mainly due again from their growth in accounts receivables and unbilled revenue. Makes you wonder that not only do they have difficulty in getting paid, but they seem to have an issue getting invoices out the door too. The fact that a positive EBITDA organization has to go out and get a line of credit because they can't get paid on time and manage their cash flow better, should give investors a little bit of a pause.
Share Capital:
Attractive float of 48.6M shares with a little over 20% dilution of the past 6 months. Not bad.
25% insider ownership (per Yahoo Finance), but nothing significant in terms of insider buying this year.
1.8M options and 3.75M warrants outstanding
Income Statement:
Revenue performance continues to be impressive with $29.1M in the quarter, 6x greater than they achieved last year. Those increases came with a margin hit however, with a mindblowing 3600 basis point drop, from nearly 60% margin, to only 23.6%. Gross margin dollars therefore only increased by 176%, while operational expenses grew by 230%. When you put it all in perspective, operational profit only rose by 73% on a 500% revenue increase in the quarter, AND operational profit was down QoQ while revenue was up. Big missed opportunity this far converting on all of that extra revenue. With that said, they are still producing about 6% EBITDA, which is more than you can say for a lot of Canadian microcaps these days.
Overall:
A lot of the analytics say this one is worth a close look, 6 forward P/E ratio, trading at well under 1x annual revenues, and EBITDA positive. But the concerns about their ability to collect on their accounts receivables and significantly shrinking margins are potential yellow flags as well. Kontrol Tech could help their own cause here by being a little more transparent on their A/R by including some aging reporting. If that turns out to be a non issue, then there could be some considerable value here. But I'm waiting and watching and downgrading to 2.5 stars in the interim.