I haven't reviewed "The Kraken" (boy did Sidney Powell come along at the wrong time for these guys) since October of 2022. In summary, I wasn't all that impressed, downgrading it from my previous review to two out of five stars. The stock proceeded to have a very good quarter share price wise rising about 80%, then dropping 50% in the next few months, and then up another 90%. A long swing traders dream quite frankly. The results do seem to be somewhat improved since my last look so let's check in on how they are doing.
Balance Sheet:
The balance sheet is in a very similar position to where it was 13 months ago when I had a look then - mediocre at best with a current ratio just shy of 1.1. That consists of a butt clenching $800k in cash, $11M in receivables, $1.2M in prepaids and a hefty $19.8M worth of inventory over current liabilities of $37.6M. Cash is making up less than 2% of current assets, far from ideal. Receivables seem to be a little better controlled, but without providing an aging report it remains uncertain to what degree. Inventory is up 74%, not in a much different place relative to revenue than it was a year ago, but the amount of investment needed to drive their revenue for such a mediocre turnover ratio is something to watch. The company has a total of $11.5M lines of credit, for which a total of almost $7.7M has been drawn against, and that has grown by $1.7M in the past nine months. In addition, no real long term debt here outside of a very attractive 1.23% equipment and infrastructure loan which doesn't mature until the end of 2026, making anyone up for a mortgage renewal extremely envious.
Cash Flow:
$4.1M of operational cash flow achieved YTD compared to burning $475k during the same period in 2022, so a very nice impressive turnaround. They do not provide an additional breakdown of non cash working capital adjustments which is highly unusual. during the year they paid out $2.25M in contingent consideration, purchased $4.7M worth of hard assets, and paid off $5.1M in long term obligations. Overall despite being operational cash flow positive, their cash position has depleted by nearly 93% from the beginning of the year making them extremely illiquid.
Share Capital:
- 206.1M shares, about 1% dilution in the last 15 months since we last looked almost all due to 4.5M issued for contingent consideration
- 8.2M options outstanding, with most of the exercisable ones ITM, which could provide some much needed cash into the treasury, potentially about $1M over the next 8 months
- 22% insider ownership (per Yahoo finance)
- Significant insider and institutional selling. Ocean Infinity, a customer of Kraken exited their enormous position of 22M shares just before financials were released. Oddly enough it appears they lost out as they could have received 20% more on those shares today.
- The former CEO has also been dumping stock, getting rid of approx 10M shares from his top position. Sour grapes? Just a douche? IDK.
- On the flip side, there has been decent insider buying as well from people still in the building, but no where near the amount to offset the above
Income Statement:
Really nice quarter on the top line with revenues up 65% to over $20.2M, consistent with what they have done on the year, up 66% through nine months totaling just shy of $33M. Margins are night and day better than when I looked at them last achieving 49.2% in Q3 which was up a monumental 1310 basis points from 36%, and on the year achieving even better rates at over 53%, leaps and bounds above the 40% achieved through three quarters a year ago. Really nice start to the P&L.
Even with massive R&D expenditures, over 200% more than last year, their overall cash burning expenses still achieved some conversion, growing at 46%, much less than their revenue or gross profit dollar rate of growth, with the exception of Q3 admin expenses which grew at 75%. That all combines to much improved profitability. Net income of $2.3M, over 10% of revenue in the quarter and $3M YTD. A very nice quarter indeed.
Overall:
Mixed feelings, but certainly warming up to them. Much better shape overall, particularly on the P&L and cash flow side. They look a lot better in all areas except for their balance sheet. To be frank, it looked like butt 13 months ago, and it doesn't look like they've wiped since. It's in fact slightly worse. The good news is they are generating operational cash flow instead of burning it, but their current cash + receivables less just their A/P is a $2M shortfall before they address their $7.75 line of credit bank debt. Let's see how lean they can be in the next couple of quarters to improve this - their admin expenses growing by 75% in the latest quarter on 65% revenue growth needs to be better.
Their current quarter projects to make them over an $80M revenue generating organization that is currently OCF+, now turning a profit, and puts them at about a 1.5 sales to MC ratio. Potentially very attractive if they can work their balance sheet issues out. Multiple news releases in Q3 with new multi million dollar contracts have been announced, and let's be real, they do some really cool things.
Encouraged, but maybe not quite ready to pull the trigger here myself without more DD. Five months until we see annual financials. Chart wise, anything near that .57 support line appears like it's an attractive entry.
Full star upgrade to three stars and this maybe not the only time I blog about them in December.
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Disclaimer:
My intent is for my reviews to be a bolt on to due diligence that you have already completed. I receive dozens of review requests a week, therefore my own DD may be great or none whatsoever. Unless otherwise stated or implied, my opinions are on the financial performance of the company based on their most recent filings and I do so without formal financial compensation. I conduct these reviews to assist other retail investors whose research skills are limited when it comes to reviewing financial statements.
Wolf FINS Reviews are intended to be informational and are based on personal opinion. They are not intended to be financial advice, and all readers are encouraged to perform their own due diligence prior to their investment decisions, including discussions with their investment advisor.