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5 Small-Caps on Fund Manager Steve Palmer's Radar Screen

Streetwise Reports, Streetwise Reports
0 Comments| March 20, 2019

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Streetwise Reports: Steve, would you give us an overview of the AlphaNorth Capital Conference?

Steve Palmer: We held our 6th conference in Nassau, Bahamas, in January; it's focused on small-cap non-resource companies. This past year we had a lot of technology and cannabis companies. There were also healthcare and consumer products companies.

SWR: How many companies attend the conference?

SP: It's grown every year since we started it. This year we had three tracks with 18 companies in each track.

SWR: Would you tell us about a couple of the companies that you're excited about?

SP: One that I'm particularly excited about is Vancouver-based Jackpot Digital Inc. (JP:TSX.V; JPOTF:OTCQB; LVH1:FSE). It has developed an electronic poker table that is like a giant touchscreen. It eliminates the requirement for a dealer, so casino operators are very keen to have this because it lowers their costs. Also, with poker there's some idle time with the players. If you fold early on in the hand, let's say, you're just sitting there waiting for everybody else to finish. But at your station, you can switch, and you can play electronic blackjack on the table, for example. So it keeps the players engaged, and it generates more revenue than a typical table would.

SWR: At what stage is the company now? Is its product in use or is it still in the prototype phase?

SP: It has tables in use. It has a new generation table that it's getting orders for now. It has a bunch of its older generation tables currently in use, mostly on Carnival ships. It has current orders for 30 new generation tables to ship in the next few months. It just did a small private placement to fund the building of those tables.

What's exciting about Jackpot Digital is the product, and it's getting lots of new orders now. It's at an inflection point, in my view, of turning cash flow positive. When these tables go out, they are expected to generate about $5,000 per month each to the company.

SWR: The company receives a share of the earnings of the table?

SP: Yes, that's how it works in most places. Jackpot Digital has recently won some orders in France, where the rules are different. The casino industry is very regulated, and in France you're not allowed to take a share of the winnings. So Jackpot sells the tables outright, and it's building a couple for there right now.

We're pretty excited about the company; it's just getting to the critical mass now where it's going to be cash flow positive and the momentum on the table orders is ramping up. The biggest hurdle the company faces is having enough working capital to facilitate orders, which is a good problem to have.

SWR: What is the next company you'd like to talk about?

SP: Another company at the conference I like is in the cannabis sector. I don't normally talk about cannabis companies because I'm not a huge fan of the sector in general. It's LiveWell Canada Inc. (LVWL:CSE; LXLLF:OTCMKTS). Its shares are currently halted. It's going to be a CBD extraction company, and it's going to be one of the largest producers of cannabidiol (CBD) oil using hemp. The change with the Farm Bill in the U.S. has really ignited this industry, and there's a huge demand. LiveWell is getting very good margins, and it's just ramping up a big facility in Montana to produce CBD oil.

The numbers are actually quite silly, if you believe them, in terms of what the going rate is for CBD oil and the volumes that these guys are going to be able to produce.

SWR: Do you expect, as more CBD oil comes out onto the market, that prices might go to a more reasonable level? Are states regulating prices?

SP: The states are not meddling in the pricing. It's the supply and demand that's created a very strong pricing environment. I've asked many of the operators in the space about it because obviously these prices can't stay where they are indefinitely. People involved in the space believe that there's going to be maybe a two- to three-year window where prices will stay where they're at until the supply catches up to the demand. But you're right, over the longer term, these kind of prices won't last. For example, CBD oil sells for $6,500–10,000 per kilogram; that's the going rate right now. And it's been at that level for many months. And LiveWell is producing at less than $500/kg, so it has very strong margins.

LiveWell is currently merging with a company called Vitality CBD Natural Health Products Inc., and that's expected to close in the next few weeks. It is guiding to having the stock back trading in March. So I'm excited to see, when it starts trading, how investors react to that.

SWR: Is this a merger of equals or is LiveWell acquiring Vitality?

SP: It's a reverse takeover situation, and Vitality's the bigger entity. It is acquiring LiveWell.

SWR: You mentioned LiveWell is building a large facility in Montana. Does it have other facilities also at this point?

SP: LiveWell is producing currently out of another, much smaller facility. The Montana facility is going to have a huge capacity. LiveWell announced recently that it produced 200 kg of CBD equivalent in the first week of February. It expects to ramp that up to 200 kg per day by the second half of 2019. So if you do the math on that, at US$6,500 per kg, that's US$1.3 million a day in product. So you can get to some pretty big numbers.

SWR: Is there anything else you want us to know about this company?

SP: Just that its numbers look very attractive to me based on the current pricing environment and it should be trading sometime this month. It has plans for a U.S. listing shortly thereafter. So it could be quite an exciting one to watch.

SWR: What is the next company?

SP: Another one I like that was at the conference is Assure Holdings Corp. (IOM:TSX.V; ARHH:OTCQB). This is an interesting one because it has some decent revenue already. It has equipment for neuromonitoring certain surgical procedures, and it's only in one or two states at the moment. But it has expansion plans to move into other states in the United States. Revenue in 2018 was about $25 million with roughly $15 million in earnings. The revenue growth profile, once it starts adding these other states, is quite significant.The company is forecasting a 70% increase in revenue growth for 2019.

SWR: Any other companies you would like to mention?

SP:Avivagen Inc. (VIV:TSX.V) is worth talking about; it's fairly timely. The company recently received a very significant order in the U.S. for its product, OxC-beta. It's a proprietary supplement that it has developed that it can put into animal feed, and the trials have shown that the animals, compared to the control group, are healthier and they grow more quickly. It eliminates the need, in many cases, for adding antibiotics to the animal feed.

My understanding is the initial volumes for the U.S. are fairly significant. It has been selling into East Asia, the Philippines mainly, for the last several quarters, and that's been ramping nicely. But the U.S. market is much larger, the second largest market in the world, I believe, for animal feed. So we think this is going to be a huge catalyst for the company. The third largest market in the world is Brazil, and we think that it will probably follow suit in ordering product now that the U.S. seems to be on board. There have been many trials that show that the product works. There's a big initiative to cut back on the use of antibiotics in animals, and this is a theme that we like.

SWR: Do you have a final company for us?

SP: Yes, I could mention one more. It's a Vancouver-based electric bus manufacturer, GreenPower Motor Company Inc. (GPV:TSX.V; GPVRF:OTCQX). It's making great gains. It's one of the few companies that I've come across in the last year that has actually exceeded its expectations in guidance. It is selling buses mainly into the California market, where there are huge incentives for school districts and other transportation municipalities to switch to electric buses. It is ramping up production this year. It should more than triple revenue in 2019 versus 2018.

SWR: Thanks for your insights, Steve.

Steve Palmer is a Founding Partner, President and Chief Investment Officer of AlphaNorth Asset Management and currently manages the award-winning AlphaNorth Partners Fund, AlphaNorth Growth Fund and AlphaNorth Resource Fund. Prior to founding AlphaNorth in 2007, Palmer was employed as Vice President at one of the world's largest financial institutions, where he managed equity assets of approximately CA$350M. Palmer managed a pooled fund, which focused on Canadian small-capitalization companies, from its inception to August 2007, achieving returns of 35.8% annualized over a nine-year period, which ranked it No. 1 in performance by a major fund ranking service in its small-cap, pooled-fund category. Palmer earned a bachelor's degree in economics from the University of Western Ontario and is a Chartered Financial Analyst.

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