Private Placement Opportunity: Torino Power Solutions

Torino Power Solutions (TPS.C) private placement of units priced at 7.5 cents with 15 cent 24-month warrants. Closing price on Friday was 15 cents.

CLICK HERE FOR THE SUBSCRIPTION DOCUMENTS YOU MUST FILL OUT TO REQUEST PARTICIPATION

I participated in the private placement for TPS last week. Management has a goal to close it on May 24th, and by the looks of the market price, there is good reason to suspect it will be filled or oversubscribed. However, it doesn't hurt to try to get in at the last moment. I wanted to tell people about this sooner, but I've been busy and there are risks associated with this investment that I wanted to explain. So this write up will take me a while. At least people will have a couple of days to make a decision as well as can use this as a primer on the company should they wish to buy shares on the open market.

Why did I participate in this placement? It should be obvious by the stock price. This is pretty much free money if you can wait out the four month hold period and the stock price doesn't hemorrhage 50% back under 7.5 cents during that time. If I was not able to get into the private placement I probably wouldn't buy shares on the open market at this time, but I would keep a close eye on it on my watch list. In the event of big news, I'd rather be one of the first ones in at 9:30, at say, 20 cents, than alerted by price-volume leaders at 9:45 and have to pay 30 cents or more. I believe that TPS has potential for that kind of move.

TPS has a clean balance sheet (meaning no debt other than a small amount of payables), around 33 million shares outstanding and around 40 million fully diluted. After this financing closes it'll have around 40 million shares outstanding and 50-55 million fully diluted. The float on it is ridiculously thin. Look at this L2. As of this writing there is less than 100,000 shares on the ask to 19 cents.

If there is good news on this stock, I can see it racing to at least 30 cents and possibly as high as a dollar in short order, depending on the news. If there is no news and the stock price stagnates, all I have to do is hope it stays in this range or at least above 10 cents in four months when the hold period expires. Having such a thin float does present a risk too, should everyone in the private placement decide to sell shares as soon as the hold period is up and it does tank below 7.5 cents on that selling pressure.

If you fail to get into the private placement and wish to trade the stock, be my guest. Unless there is news between now and when the hold period expires I do not foresee myself trading or talking about this stock in depth. So come back in September because I think that's when things will start to get interesting.

REQUIRED READING:

All news releases and financial statements listed on SEDAR and the listing statement which looks like the equivalent of an IPO filing for the CSE:

http://thecse.com/sites/default/files/Form_2A-Torino_Power_Solutions_Inc._Listing_Statement.pdf

I'm not going to handhold people through the process so if there's a statement that I made that you're having a hard time finding the source, look through this required reading. 

Summary of the Business

TPS is pre-revenue. That means Torino hasn't made a sale yet. The business is summarized as follows in the listing statement:

"The Corporation is commercializing its patented Dynamic Thermal Circuit Rating (DTCR)
technology and proprietary system architecture for application in overhead transmission lines to address the growing demand by electric utilities to adequately increase the capacity of congested transmission lines of electric utilities in North America and Europe. The Corporation does not currently generate revenue. The technology is supported by five existing patents and two pending patents."

There is an issue with electric utilities. They don't want their power lines failing so they limit the capacity that they transfer. If there is no direct monitoring, power line stress and sag is estimated and conservative values are used based on past seasonal weather patterns. Management believes that Torino's patented sensors and Interrogator system will enable power utility companies to increase their capacity by 5 -20%. According to the listing statement:

"The patented technology enables the monitoring of the dynamic thermal circuit rating of
transmission lines. At time intervals predetermined by the requirements of the utility operator, the technology monitors the temperature and stress of the transmission line conductor as well as the meteorological conditions. The system consists of two major subsystems; a passive part which is a microwave resonant cavity sensor and an interrogator which is an active component. The sensor is installed on the conductor; the interrogator is installed on the pole in a safe zone area."

Torino is not the first company to come up with such an idea. There are four other competitors named in the listing statement that sell these types of sensors.This market is not saturated so I have two schools of thought on this. Either there is just not a great enough demand by utilities for this kind of product, or what's available on the market is not meeting the needs of power companies. Anyone from Ontario like me knows the absolute debacle surrounding Ontario Hydro, with the government of Ontario (rightly) taking a lot of heat. Capacity issues will only increase with time as the population grows, particularly in regions under stress already like the Greater Toronto Area. So I am willing to give this sensor industry a shot.

Torino believes that it offers a superior product. I believe that the key two advantages over its competitors based on my conversation with the CEO are 1) the system doesn't need a battery nor a power source and 2) the system can measure sag AND conductor temperature of a single line while competing technologies measure either sag OR conductor temperature of a single line. TPS has gotten FCC approval in the U.S. and Industry Canada approval in Canada to operate its Power Line Monitoring system within the specified frequency band last fall. This was obviously a major required step needed by the company in order to proceed with a marketable product. The company's technology was developed at the University of Manitoba and the company owns all patents and design outright. There are two milestone payments of $250,000 each upon achievement of $10 million and $20 million in revenue.

So far TPS has announced a trial relationship with one power company, Tri-State Generation and Transmission Association, Inc. The agreement was signed in June 2016. In March the company announced that this trial agreement was upgraded to a more active power line. My first reaction when speaking to the CEO was that this is a VERY long lead time between a trial agreement and a potential revenue-generating agreement. However, I also noted that TPS is only asking for $500,000 in this private placement. Based on the burn rate, I estimate that this money would only take Torino to the end of 2017 if no sales are made. It would make sense to raise a lot more unless there was the expectation that revenue will be coming in 2017.

After speaking with the CEO and considering the small raise, I think there is a reasonable chance to expect some kind of revenue-generating agreement in 2017. Though the exact nature of that is unknown to me, for obvious reasons he had to be vague. There is also no guarantee that there will be an agreement announced in the coming months and that the company will need to raise more money in the near future. Each system which contains one Interrogator and three sensors would cover a 12 kilometer radius. As in other words, a typical-sized power company which wanted full coverage would need to order thousands of devices. Even one which wanted to cover only the areas under high stress would need dozens or hundreds. So there is reasonable potential for a news release on a massive sale. 

The CEO called Torino an IIoT (Industrial Internet Of Things) company. It sounds like they are looking to capitalize on the growing IoT craze which would be a smart strategy to ensure a robust stock price along with executing on the business.


Management Team

The person who I spoke with was CEO Rav Mlait. His business associate, Bryan Loree is the CFO and these two have collaborated on numerous projects in the past. When I spoke with Mr. Mlait, he was courteous and appeared knowledgeable of the opportunity. However, the management team of TPS doesn't appear to be on the level of the management teams of my other major investments.

People like the Itwaru brothers or PKK's management are business builders. If you look at their CV, they have a history related to payment processing, fintech and business development in China, respectively. Their prime focus over years has been on their duties to the companies in which I'm invested.

Contrast that to Rav Mlait. Have a look at his LinkedIn profile. He and Bryan Loree have had multiple projects, some of them ongoing simultaneously. Mr. Mlait is the CEO of Cannabix Technologies (BLO.C), a marijuana breathalyzer development company and was the CEO of Rockland Minerals Corp, an exploration stage mining company. He jumps from industry to industry. Rather than being a business builder like the people I just mentioned, he appears to be an early-stage promoter. If he wishes to become a business builder with TPS and BLO, he will have to prove that to the market. In the listing statement it states that he expects to dedicate 35% of of his time to TPS, though that may be higher now since he has given up his position with Rockland. But that is still much less than the proportion of time dedicated by Andre Itwaru to FGD or Johnson Joseph to PKK, for instance.

Regarding his past mixed history of success, I am going to give him a pass. The very nature of start up investing is high-risk. Many companies fail for every successful one. If you were an investor in Mr. Mlait's companies in the past, you might have lost money on several of them, but then made 500% or more on BLO. A consistent early-stage investor in all of his projects would have made money under his watch.

The first major test for Mr. Mlait with TPS would be upon a major contract being signed. I asked him about manufacturing and right now it is all in-house which he described having capacity to build "a few" units. What would happen if a major deal gets signed and a power company orders 1,000 units? Would the company outsource? Or try to build capacity in-house? The latter option is filled with operating challenges and risks. The former option might result in lower long-term margins and the company would be reliant on its supplier to make good on orders. The CEO's answer wasn't very clear to me. That could be indicative that he has a plan in place but can't disclose that to me or anyone else, or that there isn't one in place yet.

Torino's lack of size might present a challenge to its sales strategy since its competitors are more mature and may have the capacity to fulfill larger orders. Power companies would know this. So even if the technology is superior, the manufacturing capacity puts Torino at a disadvantage. There are ways around this which an early-stage promoter would understand and may actually be better suited for this company - discussed in the next section. 


Conclusion: What I Think Will Happen

Based on my conversation with the CEO and the small size of the raise, I think TPS has a reasonable chance to procure a contract in the coming months. Once a contract is announced, it might be a good time to offload some shares on the spike. There could be another substantial private placement to raise funds to build the capacity to fulfill the order. Or there may be other challenges that arise as the management team tries to build a business.

However, as demonstrated early-stage promoters, Torino's management team may have other ideas in mind. Rather than build the devices themselves, maybe they plan to license the technology. Or perhaps they are fishing for a buyout that will come at a much higher valuation upon further proof of concept with Tri-State or upon a large contract being signed. Early-stage promoters look for an early entry and an early exit to gain a quick profit.

No matter what the eventual outcome, I think TPS can return me several times my money in a timeline measured in months if a contract comes. Hell, it's already given me a double (excluding the value of the warrants) and I just wired the money a couple of days ago.

If I'm wrong and no contract comes in 2017, I think the TPS management team's skill as early stage promoters will be helpful in keeping the stock price robust enough so that I can sell the shares if I so choose to at a price well above 7.5 cents and keep the warrants as gravy over the next two years. The risk-to-reward payoff of this private placement made a lot of sense to me and that is why I participated in it. If TPS makes a lot of sense to you as an investment, either as a private placement or by purchasing shares on the open market, I have made a Facebook group for this investment, Torino Power Solutions Private Placement Opportunity and Investor Group:

https://www.facebook.com/groups/302777856828727/