Buy Recommendation
Business: Designs, engineers, manufactures, and sells fuel-saving, emissions-reducing hydrogen generator aftermarket products.
Trades Canada: DYA USOTC: DYFSF Price 11/25/16: US$0.377 Shares Outstanding: 222,663,658 Market Capitalization: US$ 84 million Insider, families, friends, etc.: 70% Progress Rating: A2 Phone Number: 416-766-9691 Web Site: www.dynacert.com 12-Month Price Target Range: US$2.00 to US$2.50
I sold this stock at $0.077 back in June for a 19% gain. Obviously—with 20/20 hindsight—that was a mistake, given the explosive price of the stock in early October. What troubled me in June of this year was what appeared to be a constantly changing business model combined with a focus on down-the-road-blue-sky potential rather than on building the company one step at a time by starting with modest-scale but profitable production of the company’s HydraGenTM product. A trial with one hundred Pepsi trucks in Detroit showed more than a 14% reduction in fuel consumption and significant reduction of emissions. When I first added this story to this letter, it was with the view that by the end of this year significant production and sales for the company’s HydraGen product would be forthcoming.
But The story got more complicated when Justin Trudeau was elected Prime Minster of Canada. The new Prime Minister immediately let it be known that he would support all manner of legislation that would subsidize “green” technologies. As a free market libertarian, such interventions are difficult for me to support, to start with. Moreover, I guess you could call me a skeptic when it comes to global warming “science.” I’m simply not convinced. But be that as it may, what’s not to like about reducing fuel consumption or creating cleaner air, with or without humancaused global warming? So I could get behind this company and own it if I thought it would finally focus on building a company rather than hyping futuristic applications of its technology. In short, I wanted to see some sales and market validity of the product.
When the company started talking to government about subsidies for its product, it meant it had to work through bureaucratic channels that would further delay production. The government also required third party verification of the results from a source different than the company had been using from its Pepsi truck trial a few years ago. All this would take additional time while. Meanwhile, there was a move on the part of certain players to hype the stock which I found distasteful. In short I was looking for substance, not hype. I lost patience. But now, I’m convinced DynaCERT is now in the process of production and sales that can make this company a major success story.
A big stock promotion at the end of September shot these shares from about C$0.15 to over C$0.90. Just as suddenly, the stock price collapsed back to around C$0.25. However, from that point on, some very important fundamental events started to take place, providing the reason I am recommending purchase of dynaCERT once again:
• August 25 – dynaCERT announces plans to move to a larger HydraGen facility. The company announced plans to move to an 8,000-square-foot lease expansion facility on October 1, 2016. The space will enable the company to build a plant with a capacity to build 2,000 HydraGen units per month per eight-hour shift. • August 29 – dynaCERT appointed Mr. David Bridge as Chief Operating Officer. Mr. Bridge has an extensive background in managing technology operations and multimillion-dollar corporate ventures. He is an accomplished leader with extensive knowledge of restructuring and streamlining information technology to increase efficiency and reduce cost. Mr. Bridge has held several senior IT positions with major firms for the past 25 years, as well as successfully led teams at AMD, RBC Financials, Virgin Mobile and Blackberry. As the senior IT leader, he helped Virgin Mobile in Canada expand from a start-up to a key competitor in the telecommunications sector. In his most recent position at Blackberry as a director of infrastructure, architecture and engineering, he led a high-performance team that designed and supported large-scale enterprise wide systems.
• August 29 – dynaCERT also announced its State State-of-the-art electronic control unit. The dynaCERT team of engineers and scientists, under the supervision of Mr. Bridge, has worked closely with RMF Design and Manufacturing along with diesel and electronic technical experts to finalize the electronic interface, design and development of the state-of-the-art smart ECU (electronic control unit). This smart ECU is the brain of the HydraGen unit. Its capabilities are similar to those of a smart phone wherein it can listen to the on-board engine computer and respond accordingly. The smart ECU has shown significant advantages and improvements over the initial version of the ECU as to the reading, collecting, transmitting and storing of data pertaining to fuel efficacy and emissions reductions. The smart ECU communicates with the engine's on-board computer, learning and altering the flow of gases produced and introduced to enhance combustion. It also has GPRS capability for remote access by both the company and end-users, allowing for tracking and monitoring of carbon credits. Mr. Bridge commented, "I am excited about joining dynaCERT and the launch of this new product and as we continue to innovate."
• October 10 – dynaCERT applied for Canadian and U.S. patents for its Smart ECU. • November 8 – DynaCert was named as one of 20 topmost innovative companies in Canada. While this has little directly to do with the fundamentals of the company’s business, it did provide visibility of the company to the equity markets. • November 15 – dynaCERT announced third-party verification of the HydraGen unit’s ability to reduce fuel consumption by up to 19.2% and carbon emissions by up to 40%. As well, it confirmed reduction of particulate matter by 65%. This was for Class 8 truck application. As noted previously in my coverage of dynaCERT, the company’s technology has many other applications, some of which may actually provide greater promise than for trucks. But this was the most important hurdle in my view to enable the company to move forward toward production. • November 21 – dynaCERT announced it hired a consulting firm to assist it in building its plant capable of producing 2,000 HydraGen units per month per eight-hour shift, or 6,000 units per month per three eighthour shifts. • November 21 – dynaCERT also announced that it is applying for various federal and provincial grants supporting business growth, research and development, and expansion of the company’s technology and intellectual property. That includes developing, testing, and verification for off-road construction vehicles, railway locomotives, ocean-going ships, off-the-grid systems, and land-based power generation units.
From my perspective, the most important news since June of last year was the third-party verification because that means it enhances confidence in its technology and is apparently leading toward a production facility that should bring in substantial revenues and profits, especially if the demand for 6,000 HydraGen units per month is a reality. But longer term, the November 21 announcement regarding the many different applications for its technology is truly exciting. I have always been enamored by the company’s longer-term prospects, but my complaint was that I wanted to see “proof in the pudding,” so to speak, by startup production. It now seems that is indeed a near-term prospect, which is why I am recommending this stock again in this letter.
Past Analysis of HydraGen Sales and Profit Prospects
In the past I compared the technology of dynaCERT with that of Tesla, noting the following:
While Tesla may be getting all the fanfare with a multibillion dollar market cap, dynaCERT is one tiny market cap company with a technology that is by far more energy efficient and green than the much ballyhooed electric Tesla car. I feel confident in saying that for two reasons: First, a trial on dynaCERT’s HydraGen Technology on some 200 trucks, most of which were Pepsi trucks in the Detroit area, has proven the technology’s ability to reduce energy consumption by between 10% and 20% while reducing toxic gases within the carbon emissions by 35% to 40%; secondly, dynaCERT’s HydraGen car does not consume energy to save energy as Tesla’s technology does, which relies on carbon-based power generation, much of which relies on the dirtiest of fuels—low-quality coal, especially in rapidly growing, heavily populated countries like China and India. The market potential for this company is mindboggling. While the company’s first application of its technology has been for long-haul diesel trucks, we could see absolutely explosive growth in the auto sector as dynaCERT is now testing the dynaCERTTM technology on a Volkswagen model with the view to helping that company and others urgently overcome the inadequacies of existing technology in meeting emission standards without reducing mileage efficiency.
The auto industry is a monster. But there are additional applications of massive scale, such as oceangoing vessels, train engines, and power generation. So the upside for this company is absolutely astounding. What the company has needed but until now lacked is third-party validation of its trial results. Now that it has ironed out that issue, I believe the company is in a position to begin meeting a pressing energy need for the global economy. Both validation and orders are now being revealed for the trucking industry with a significant shipment scheduled to take place in January 2016. While this is a speculative story at this stage, I believe the table is set for a massive upside breakout in dynaCERT’s share price. I am suggesting that a target price of $1.00 over the next 12 months is reasonable and attainable, assuming management can execute its business plan.
The Technology
DynaCERT’s technology is centered around providing a hydrogen-oxygen mixture (H2/O2), generated on demand through electrolysis, for combustion engines. The company acquired the intellectual property including all patents and patents pending for the technology behind HydraGenTM.
The benefits of this additive have been investigated by several researchers. Here are a few of the established findings by the scientific community;
• The flame speed of hydrogen is nine times faster than the flame speed of diesel, burning diesel in the presence of hydrogen will result in overall faster and more complete combustion. This will result in higher peak pressure closer to the Top dead centre (TDC) and therefore, will produce a higher effective pressure to do work.
• Even a small amount of H2/O2 injected into the air intake to enhance diesel combustion decreases the brake specific fuel consumption (bsfc) regardless of the level of load.
• The induction of H2/O2 contains oxygen; as a result, the increase in the air-fuel ratio improves the combustion resulting in lower fuel consumption and better efficiency. (Fig 6)
• Hydrocarbons and CO2 are reduced, due to the absence of carbon in hydrogen fuel and also due to better combustion of diesel fuel with the aid of hydrogen which has a higher flame speed. (Fig 8 and Fig 10)
• Although CO values for neat diesel operation is relatively lower, by inducting H2/O2 into diesel the CO amount is further reduced.
Truck Trial Results
In the Pepsi program dynaCERT Inc. installed 187 HydraGen™ units. To date they have driven over 18 million miles with 95% uptime, and have documented fuel savings of over 15%.
The bottom line: 4,200 hundred gallons of fuel saved per year per truck, on average. This represents >$3 million in fuel costs alone. Table 1. (Left) -- This is a selection of the Pepsi trucks whose mileage was documented and benchmarked to the industry average. DYA.V technology showed a clear 10-20% increase in fuel efficiency.
At those rates, and with its prices, dynaCERT can provide the typical truck owner with a less-than-one-year payback period on one of its retrofitted units. Long-haul trucks that operate continuously will use upwards of (20 or 30 thousand) gallons of fuel per year and could potentially experience a payback on investment (based on an installed cost near US$10,000) within as little as 4 months.
Good Results, But Why No Sales?
You may wonder, if dynaCERT’s carbon emission reduction fuel-saving technology is so good, why this Toronto-based company has reported a measly C$12,898 in sales and a gross profit of only C$9,139 over the first nine months of 2015.
Well, it looks now like sales will start to kick in next month with the company reportedly in the process of filling an order for 50 HydraGenTM units and building an inventory of another 100 units. Here’s the story.
Over the last few years DYA.V has worked with some of the largest trucking fleets in the world under the understanding that with third-party validation of a minimum 8% fuel savings they will commence outfitting their fleet with dynaCERT’s HydraGen units. For example, it worked with Pepsi in a 200-truck program out of Detroit. There has been no disagreement that dynaCERT’s technology accomplished 8%+ fuel-savings. The problem for an undercapitalized company has been the time and expense required to secure third-party validation. As reported above, on November 15 the company now does have third-party validation and the results are similar to those of the company and Pepsi earlier on.
The Economics of HydraGens
From the company’s Web site, here is a pro-forma projection of how the company has envisioned the economics of its HydraGen business for trucks only. Please take these numbers with a grain of salt as they were from my initial coverage of this company in 2015.
The trucking industry accounts for 12.8% of all fuel purchased in the U.S., according to www.Truckinfo.net. There are 192,000 trucks sold annually in the U.S. alone. There are an estimated 15.5 million trucks operating in the U.S. and some 10 million trucks operating worldwide. The units are priced to allow a truck owner to enjoy a return on his HydraGen investment within one year, which I understand is possible even given current low fuel costs. In other words, this application is enormous. Unless there is a more economic alternative to the HydraGenTM technology, if dynaCERT is successful in marketing this story to the industry and assuming it is able to raise the capital required to build inventory and meet other working capital needs. To the extent operations are profitable out of the gate, the company should be able to build some of its early working capital organically.
The proforma numbers above extend to up to 60,000 units per year. The company has its components manufactured and those numbers are built into the proforma above. DynaCERT then assembles the units and tests the units before shipping. As noted in recent press releases, management has now secured a facility that will allow it to produce 6,000 units per month working on three eight hour shifts. Thus in the second column from the left, you will note projections based on 6,000 units of HydroGEN production per month. Again, please let me underscore the point that the numbers in the chart above need to be verified with management as they are numbers presented when I initially wrote about this company in 2015. I hope to speak with management next week to determine to what extent if any, their vision of the economics of their manufacturing process has changed.
Other Massive Markets
Power Generation – Management has begun testing its technology for power units in the Dominican Republic where reliance is mostly on costly diesel fuel. Specifically it has engineered the HydraGen unit for large stationary power generation combustion engines that require hydrogen at a high rate, up to 300 L/minute. These units will sell for around $500,000 each. With energy savings of just 5%, these units can provide a return on investment to the buyer in just eight months. Following are pro-forma projections from the company for the HydraGen units to be used in power generation.
Again, assuming these pro-forma numbers hold up with marketing success, the prospects for earnings from this sector look extremely promising. In addition to a company that has been undercapitalized, another constraint in moving this segment of the company’s business forward more aggressively thus far is related in part to geography. The company’s first tests have been carried out in the Dominican Republic. Given the tropical climate and limited power capacity in that country, the time allotted to test is limited to a couple of the cooler winter months when electricity demand for air conditioning is limited.
Clearly these larger units have potential application wherever power grids are not available, such as at mining projects in remote locations. A couple of the most promising applications appear to be for rail and oceangoing vessels. What adds significantly to the economics especially for shipping is a reduction in the opportunity cost of needing to haul less fuel when the HydraGen are used. Transatlantic ships, for example, need to haul a huge amount of fuel just to be able to cross the ocean. Reducing the amount of fuel requirements means more capacity to haul more profit-generating cargo instead.
What About the Auto Industry?
With the revelation that Volkswagen has cheated on its emission standards, a door into this enormous sector for dynaCERT’s technology may well be opening up. The problem the automakers have is that when they comply with the emissions standards, it cuts down on the mileage. That’s because typical emission control solutions treat engine exhaust gases after the burn, at the expense of loss of power and increased fuel consumption. On the other hand, dynaCERT’s HydraGen improves combustion resulting in a cleaner burn that produces increased torque, improved fuel savings, fewer oil changes, less carbon buildup in the engine, and significantly reduced toxic emissions. In other words, HydraGen not only reduces the emissions by 35% to 40%, but also increases mileage, enhances performance, and lowers maintenance costs. I could be missing something here, but it seems to me this is a musthave technology for the automobile manufacturers.
Given the performance of its technology, management believes it has a winning solution for the gigantic car industry. So, on Dec. 3, the company announced it has developed a compact version of the HydraGen unit for use on diesel-powered cars and light trucks. This compact unit (smaller than a cereal box) is based on the patentpending HydraGen technology, and the development effort is a direct result of the pressing need by the automotive industry for a permanent, at-the-source solution to reduce carbon emissions in diesel engines while improving fuel consumption.
The first of the new compact units is being installed on a 2.0 liter turbo diesel Volkswagen Passat (2013 model year) import sedan for testing. This test is being performed within the dynaCERT’s own facility, after which the company plans to submit the data to an outside third party for validation. This testing is done independent of any automobile manufacturer and financed wholly through internal R&D budgets. Depending on the results obtained, further longterm, large-scale testing will require participation from one or more diesel engine manufacturer and automobile manufacturer.
MANAGEMENT
DynaCERT’s board of directors and management team have a well-rounded combination of people that each contribute expertise in disciplines necessary for a successful organization. Leading this team is Jim Payne, President, CEO and Director - Mr. Jim Payne is Chief Executive Officer, dynaCERT Inc. Mr. Payne also serves as Chief Executive Officer of his privately held consulting, project management and real-estate development company operating in the GTA and surrounding areas. Mr. Payne graduated from St. Clair College in Construction Engineering, Project Management and Estimating in 1974. He has successfully built and managed his own private companies for more than 38 years. This provides Mr. Payne with years of experience in accounting, business leadership, and the legal aspects of governance. Over the last decade Mr. Payne has taken his natural networking skills and built on them to create strong team dynamics that lead to success and generate movement. With a strong leadership presence, Mr. Payne is leading dynaCERT in a way that has helped to streamline corporate activities, generate growth, form new partnerships, and bring the corporate vision to a reality. Please visit the company’s Web site for a full description of this company’s management talent.
As noted above, David Bridge has been hired as the company’s Chief Operating Officer, and Gonzalo Labbe has been hired to head Product Development. For a complete list of management, the Board of Directors, and Engineering and Operations Team, visit the company’s Web site, www.dynacert.com.
THE BOTTOM LINE
DynaCERT has cleared the most significant hurdle that has kept it from marketing its outstanding HydraGenTM technology, that being third-party validation. With the use of the Smart electronic control unit (ECU), data can continue to be gathered for ongoing verification, but also and more importantly, for ongoing fuel efficiency and emissions reductions.
The proforma numbers shown above for the trucking and power-generating industries were numbers I picked up from discussions with the company when I recommended this stock in December of 2015. Please take them with a grain of salt for the moment. The economics may have changed for better or worse. On a positive note, it is my understanding that in Canada, truck drivers will be offered a $1,500 rebate on a $10,000 unit, thus reducing the time it takes for a truck to recover its capital cost. That may not make a difference in unit profit margins for dynaCERT but it may well stimulate sales. But for sure, if the margins hold up akin to those discussed above, dynaCERT should become a phenomenal growth story in 2017. With management planning to build a 6,000-unit-per-month plant for its initial HydraGen product for trucks, and assuming the margins hold up akin to those that management suggested previously, the company would generate a net profit per month of just under C$18 million or $0.08 per share. Multiply that out over 12 months and you get to annual EPS of C$0.96. A PE of 10 times gets you close to a $10 stock on the basis of this one application alone.
Could this be for real? I’m a bit hesitant to say it is, simply because of my history with this company. I have heard a lot of “exciting” stories in the past and most of them were more like exciting dreams that did not turn out to reflect reality. My approach is to take one step at a time. I think with the construction of the plant and sales over the next few months, we could see a stock price of C$2 to $3. If/when sales grow and profit margins remain anything like those noted above, and as other applications begin to come to fruition, I think the equity markets will start to bid up these shares. If on the other hand some unforeseen circumstance negates the sales and margin premise noted above, this could be an embarrassing recommendation. Let me just say that over the next week or two, I want to discuss profit margin assumptions to learn how they may have changed from those set out above. Once again, take those numbers above with a large grain of salt until you hear from me again.