Smartcool hits perfect storm for profits

I have been following Smartcool Systems Inc. (SSC:TSX.V) since July when its stock was $0.04. I still think it is at a very attractive price. The company has come along with the right technology at the right time that can save power consumption or electrical costs from 20% to 40% on cooling equipment like refrigeration, air conditioning and heat pumps. There is a big focus now on saving energy costs and reducing one's carbon footprint. Electricity costs have been rising in many parts of the world and are very high in many countries, such as Germany at $0.35/kWh, and in the Caribbean, Barbados is US$0.35/kWh and Antigua is $0.38/kWh. The last available data for Europe is from 2015, and it shows an average of $0.21/kWh. The U.K. has seen one of the highest electrical rate increases in the past decade, up 142%, making it a focus country for Smartcool.

Smartcool's technology has started to gain a lot of attention and I believe it could go viral. In the past month or so, companies like Mercedes-Benz, McDonald's and large building maintenance companies such as Alternative Power Solutions in Jamaica have adapted the technology and will expand it across their global footprint. Just this week, Smartcool partnered with Cleantech 100 giant Anesco Ltd. of the U.K., which for four consecutive years has been in the top 100 cleantech listings, among 9,900 companies in 77 countries, and the fastest growing company in the U.K the past two years. This is a huge endorsement for Smartcool's technology.

This is a simple story of a technology advancement coming at the right time.

The technology is a simple control and a chip with algorithm that goes between the thermostat and air condition unit/compressor. By controlling the compressor, the technology reduces electrical costs by 20% to 40%; this is a huge savings on commercial applications. I actually have seen one application where a third party verified 60% electricity savings on heat pumps. Originally the unit used a computer, and the cost to install was about $10,000; even still the company got a revenue run rate approaching $10 million several years ago, mostly from a dealer distributor in Britain.

The company drifted without a good sales strategy by relying on a couple of distributors, so revenues dropped off as the distributors exhausted their customer base. In late 2016, the president resigned and the original founder, Ted Konyi, came back to actively manage the company with a new sales strategy and has put together a highly motivated and experienced sales team. With that, sales have been taking off.

Theodore H. Konyi, president and CEO, has over 30 years of experience as a financial entrepreneur. As founder of the Maxwell Group of companies, he has been involved in the start-up and growth phases of 15 corporations, primarily in the energy and technology industries.

Nick Weedon, joined in 2016 as Smartcool's national sales manager. Nick has extensive experience in sales focused in the electrical/energy sector. He was key account manager at Edmundson Electrical, and prior to that was national sales manager with Rexel Services & Solutions UK, and before that was sales manager at Fairway Electrical.

On May 30, Smartcool announced a partnership with the Wates Group in the U.K. Wates was formed in 1897 and is one of the U.K.'s largest family-owned construction, property services and development companies. Wates employs over 4,000 people and works with more than 10,000 supply-chain operatives and partners to successfully deliver projects throughout the U.K. With a revenue of £1.27 billion in 2015, it saw them also acquire the Shepherd Group's construction operations for a reported £9.8 million, with some 1,200 staff transferring to Wates.

On April 11, Smartcool announced the appointment of Frank Lawrence as senior vice president cold chain. Frank's responsibilities will include the development of new global marketing and sales strategies for the company in the refrigerated transportation and cold storage verticals, initially focusing primarily on the North American market place.

On March 21, Smartcool announced the appointment of Haiwen (Helen) Qian as executive VP business development, for the development of new marketing and sales strategies for the company in North America and future development of opportunities in China.

Haiwen Qian was educated at Tianjin University of China with an electronic engineering degree. During her 20 years in various business ventures in Canada, she has founded and operated successful business in manufacturing, educational training and international trading. She is an independent investor and a business consultant. She has been involved in numerous business development projects for North American companies and has extensive experience in assisting North American companies to establish, fund and set up operations in China.

Another important sales strategy Smartcool implemented in early August is a funded sales program. The program has been designed to provide funding for clients who want to install Smartcool's proprietary energy efficiency products but lack the capital budget to do so. The first sale under this program was on Aug. 14 to Loscoe Chilled Foods Ltd., which is in the food processing and distribution business in Derbyshire, England. Smartcool installed its proprietary devices on 34 refrigeration units at Loscoe. The installation would normally require Loscoe to expend over $100,000, but with the funded solutions offered by Smartcool, Loscoe expects to cover the cost of installation over three years with energy savings covering all the costs.

Technology

Previously the costs of the control unit and computer were quite high, but with modern technology it can all be put on a computer chip and manufactured in China inexpensively. This means the margins on sales are now very high. Since the cost is now greatly reduced, when Smartcool installs one of these and charge about $10,000, margins are very strong. And now that electricity costs are much higher, the return on investment is much quicker, in many cases less than one year.

For example, on July 18, Smartcool announced savings in excess of 30% of energy at a Mercedes-Benz auto dealer in Ipswich, Britain, that is part of the Jardine Motors Group. Jardine Motors is an authorized franchisee for 23 motoring manufacturers; it operates across 70 locations and employs over 3,000 team members, operating under the successful Lancaster trading name. Jardine (US$128 billion revenue) now plans to roll out Smartcool's system across its dealerships, but this is not even the tip of the iceberg.

The savings here were on heat pumps, which means on both heating and cooling seasons.

Today, Smartcool has offices in Canada, the U.S. and the U.K., providing the ECO3 and ESM to a global network of distributors and end customers.

Products

The ECO3 and ESM are Smartcool's retrofit technologies that reduce the energy consumption of compressors in air conditioning, refrigeration and heat pump systems (HVAC-R). Saving an average of 20% to 30% kWh, the ECO3 and ESM deliver a rapid return on investment in 12 to 36 months. The technology has been validated by rigorous third-party testing, government organizations and over 28,000 private business installations.

As noted, with the company's costs greatly reduced, higher energy prices and the focus on green and reducing the carbon footprint, Smartcool's timing is very good.

• Increased energy efficiency for air conditioning, refrigeration, heat pump systems (HVAC-R)
• Shrinking of clients' carbon footprints to help them achieve green sustainability goals
• Cost savings on the operation and maintenance of any building with cooling systems
• Peace of mind with independently tested, risk-free energy efficiency products
• Extra incentives to be more energy efficient with Smartcool, such as rebates from utilities & governments

Smartcool's ECO3 is an energy efficiency retrofit product that can save an average of 25% kWh energy used by the compressor in air conditioning, refrigeration and heat pump systems (HVAC-R). The ECO3 achieves savings using intelligent cycle optimization technology.



Panoramic Power Sensors

On June 20, Smartcool announced it has entered into a VAR (value-added reseller) agreement with Panoramic Power Ltd.

Panoramic Power has developed innovative new power metering sensors that provide device level consumption data. The sensors are self-powered, inexpensive, easy to install and report to a powerful web-based dashboard where users can monitor power consumption.

When I met with Smartcool, it had just announced this deal so I have seen the product and demo.

• There are several important factors at play here:
• This technology is not new but this solution is probably the cheapest and best out there.
• It has a very powerful web or phone based management system.
• Another revenue stream for Smartcool—very good margin levels increase with volume.
• A third party product that verifies Smartcool's energy savings.
• It provides Smartcool with a total customer solution, it can monitor any circuit, not just cooling.

The device consists of an oversized ring (sensor) that would fit around your thumb. This is simply placed around the power cable of the circuit. It reports to a unit that is a little bigger than a cigarette package (Bridge) and this can produce alerts to a cell phone and a web-based graphic interface to view historic power usage in many formats and detail. It will also detect circuit failures and give real time alerts.

For example, a customer could monitor the cooling circuit for one week with the Smartcool device turned off and one week with it on to see exactly what the cost savings are.

The potential uses for the Smartcool systems are as enormous as the electrical energy market worldwide. A few examples:

• Grocery store food storage and presentation, store air conditioning.
• Wholesale food storage facilities
• Food transportation refrigeration units
• Hotel and casino air conditioning
• Any roof top building air conditioning (like Mercedes-Benz mentioned above)
• Mushroom farms
• Marijuana grow operations
• Plastics industry: a chilling system cools the hot plastic that is injected, extruded or stamped.
• Rubber industry to cool the multizone water temperature control units
• Ice rinks
• Computer data centers

I have no doubt Smartcool's technology works and can give customers substantial savings and is going to become very easy to sell. I cannot divulge their costs and sales prices as they vary by installation, but in general one installation on one chiller or air conditioning unit runs around $10,000—these are on commercial-sized units.

For example, a mushroom farm, a sector Smartcool is making good inroads on, a farm could have a dozen grow rooms or barns and each has a cooling unit—you are looking at $10,000 X 12. For round numbers that is about $100,000 on a large mushroom farm. There are over 100 mushroom farms in Canada, so that is over $10 million market potential.

The U.S. market is about four to five times larger as the country imports some, but about 50% of production is in Chester County, Pennsylvania. The state ranks as 31st for electrical costs, so it is more expensive than most states.

This is a very big concentrated market in one location, which would be very lucrative and effective for SSC to penetrate.

Financial

The financials for the last quarter ending June 30 shows about $191,000 in cash, $270,000 in receivables and $230,000 inventory. The company has no long-term debt but a $450,000 short0term loan and current debentures of $180,000.

Finances are manageable from what I see and a $500,000 equity financing at $0.03 per share closed July 7, with $120,000 of that earmarked to repay debentures. Another $400,000 was closed Sept. 8 at $0.05 per share. This should put the company in good shape for the rest of the year, and I expect better cash flows in the second half of the year.

Revenue for 2016 was $325,976 and I expect this was the trough with just $26,854 in Q2 2016. Q1 2017 revenue came in at $85,957 and Q2 revenue jumped to $261,784, up over 300% from Q1, so it appears to be on an uptrend. Most of the sales people additions, initiatives and sales contracts came after this date.

I expect revenue will see volatility quarter to quarter as it is a small company and timing of sales can make quite a difference, especially large sales that have recently been announced.

Summary

Demand for HVAC equipment in the U.S. is forecast to increase 6.8% annually through 2019 to $20.4 billion, recording gains over twice the rate of the 2009–2014 period.

That is a large market with good growth but Smartcool's potential is much larger because it is a retrofit product on units already installed. In general, air conditioners, heat pumps, and HVAC systems have a life expectancy of 15 to 25 years, so in the U.S. alone there is probably $1/2 trillion of A/C equipment running.

Smartcool currently has test installations at a number of large chain type stores or customers and a company-wide purchase order by any one of these would be have a dramatic positive financial impact on the company, the likes we have already seen with Mercedes-Benz and McDonald's.

From my conversations with the company and looking at its costs and potential sales, I am expecting a revenue increase this year of about three to five times, which would make the company slightly profitable, and another tenfold revenue increase the following year. If some of these large customers sign up, these numbers would be very conservative.

Smartcool announced it would roll out across 70 locations for the Mercedes-Benz dealerships (Jardine Motors). I estimate revenues for that rollout of approximately GBP 500,000 to 700,000. The British pound is about 1.6 to CA$1, so we are looking at about $1 million revenue on this sales order alone. The McDonald's rollout to 162 locations in Saudi Arabia another $0.5 million. This is a lesser amount because it was third party sale.

The Power Sensor segment has a very nice reoccurring revenue model that historically has not been part of the revenue stream. Users pay a low upfront cost and an approximately $5 monthly fee. Users could have a lot of these at any building and monitor not just cooling, but lighting, heating or any electrical circuit.

The margin on selling these is decent but becomes very good with higher volumes.

Smartcool has manufacturing agreements in place so it can easily ramp up for demand and it has partnered with installation companies that can do installations worldwide.

The company had very positive test results on a mushroom farm in British Columbia. When I met with Smartcool in Ontario, the company was visiting current and potential customers (mushroom farms) and attended the 24th annual national mushroom conference in Quebec.

This sector alone represents a multi-million opportunity for the company. For marijuana fans, this is another opportunity as these grow rooms require cooling because of the heat from lighting.

Data centers are prime candidates because they create a lot of heat and need cooling year around. A data center installation would represent on average around $90,000 revenue to Smartcool. There are probably around 8 million data centers around the world and the company has only installed in a handful so far.

This is data from 2014 so it is outdated, but, according to Department of Energy statistics, data center electricity use doubled between 2001 to 2006, from 30 to 60 billion kilowatt-hours of electricity, and stood at about 100 billion kilowatt-hours of electricity as of 2013. This amounts to about 2% of all U.S. electricity use and climbing. Already, there are about 3 million data centers in the U.S., amounting to about one center per 100 people in the U.S., and this is expected to continue to grow as more computing applications for large and small companies are moved to these facilities.

If Smartcool just captures 10% of the U.S. data center market, 300,000 centers offer potential revenue of $27 billion. Billion, that is not a typo; the potential is simply enormous. It is only a question of execution.

I would be very happy if the company got up to $10 million revenue.

At $0.08 and 196 million shares out, the market cap is $15.7 million.

With $10 million revenue and trading at six times revenue and assume dilution to 200 million shares would be a $0.30 share price. I believe that makes a good target for Q1 2018.

Higher revenues or multiples all the better. I am expecting numerous press releases over the coming weeks and months as the test installations result in sales. I will also add that the company has strong connections to China, which would be the largest market, but it simply has to grow some more before it tackles that avenue.

On the chart, there is a nice up-trend in place. Very good action of moving higher, consolidating and then next leg up. There is support at $0.07 and the consolidation back to the $0.07–$0.08 area after the recent high at $0.10 makes a good entry area.



Smartcool Systems Inc.: TSXV:SSC OTC:SSCFF. Recent Price $C0.08
Shares outstanding 196 million approx.

I participated in the $0.03 financing round and have purchased shares on the open market.

Ron Struthers founded Struthers' Resource Stock Report 23 years ago. The report covers senior and junior companies with ample trading liquidity. He started his Millennium Index of dividend stocks in 2003 - $1,000 invested then was worth over $4,000 end of 2014 and the index returned 26.8% in 2016. He retired from IBM after 30 years in customer service, systems and business analyst, also developing his own charting software. He has expertise in junior start ups and was a co-founder of Paramount Gold and Silver.

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