First look per an email request through wolfofoakville.com. Never heard of them, and to be honest a lot of email requests I receive, I nearly vomit upon first look. That's not the case here - at least when I glanced at their P&L. Then I search the ticker and notice Andreola is on it, so my interest is further peaked. So I went to the website to see what they do. Sadly, I have no idea what Cryogenic Milling or Spark Plasma sintering is so please don't quiz me just yet.
The stock has suffered a bit of late, down 15% last month, but is up over 100% YTD and 130% over the past year. If you were in early, you must be quite pleased today. Let's see what I think of the financials.
Balance Sheet:
Current ratio is much less than sexy at under .5. Borderline healthy is over one, so we're not off to a good start. That consists of $153k in cash, $559k in receivables, almost $100k in prepaids over nearly $1.7M in current liabilities. I like to exclude deferred revenue from my ratios but removing $116k doesn't make it look much better. The bulk of their liabilities due over the next twelve months is nearly $1.2M in advances from a related party. When you get into note five of the financials it provides details of this loan from the insider. A couple things jump out - these advances have been ongoing since December of 2018. Additional amounts were given when the bank called in their line of credit, the loan is guaranteed against company assets, the value of which do not cover the loan, and the company is now leasing space from the same related insider who also owns 17.1% of the company's shares. That's a lot to absorb. It's obviously not an ideal situation to start with here, but this individual or organization appears to have too much skin in the game to worry too much about that $1.18M needing to come due within the next twelve months. The other warning sign here is the accounts receivable at $559k which is almost half of their annual revenue and has more than tripled in the past six months.
The aging statement doesn't make me feel any better despite the $0 provision for expected credit loss. Only 40% of their A/R is current with 25% quite old. This is a very small company, where cash flow is vital and receivables just cannot be managed like this. CNO has no debt outside of the insider advance already noted.
Cash Flow:
Through six months, CNO is not operationally cash flow positive, burning $41k compared to generating $310k of positive OCF at the same time a year ago. This is all due to the receivables problem already discussed above. Good news is they have one thing to fix. A month ago, the company raised $1.5M through a PP at .15 a share issuing 10M, interestingly the stock doubled shortly after and has settled into the 22 cent range, still a nice gain for those PP participants. The PP announcement doesn't state it's for anything but general purposes. This helps solidify the balance sheet, likely enables them to settle up much of the advance to the insider, but I have to wonder how much could have been avoided if their receivables were in decent shape. Definitely something to watch in the future if you're long here.
Share Capital:
- Decent size float of 32.1M shares at timing of the financials, but the recent PP has caused 31% dilution
- Just shy of 5M options outstanding, all currently well ITM
- 5M warrants now outstanding with the recent raise
- 37% insider ownership (per Yahoo Finance)
- Could not see any insider buying in the open market but does appear their was significant insider participation in the recent raise
Income Statement:
Year over year revenue numbers are impressive with a 99% increase YTD, and up 152% in the latest quarter and gross margin is a very healthy 69% halfway through the year. I like companies who run a lean ship and this appears to be just that with $517k in expenses, up 55% on almost double the revenue so some pretty decent conversion. All that translates nicely to $305k in profit from operations or 25.5% of revenues. They were also up an impressive 24% QoQ
Overall:
I'm not so sure I like them as much as I was hoping to upon first glance. It really comes down to one issue, but for me it's a pretty big one. I think it's just unacceptable for a company to put 25.5% of their revenue on the bottom line and not be operationally cash flow positive.
My DD is next to nothing here but the next question that comes to mind is what is the potential here. This company has been around for 20 years, publicly trading for 15 and they currently trend to do less than $3M of annual revenue. Can they get to $10M, $25M? If that potential is there, then maybe I would be interested but trading at 3x revenue with an unknown upside and unattractive EV/EBITDA numbers with balance sheet concerns, I think I'll look elsewhere for now. Three meh stars.