Monday 2 November 2020

What Does DTC Eligibility Mean for Manganese X? Take a Look at PKK for One Possibility

Manganese X (MN.V) (MNXXF) announced that it received DTC Eligibility for its OTC listing in the United States. What does this mean? A simple Google search tells you this:

"DTC Eligibility means that a public company’s securities are able to be deposited through DTC. DTC is the largest securities depository in the world and holds over thirty-five trillion dollars worth of securities on deposit. DTC accepts deposits of securities from its participants only, who are usually clearing firms. Most brokers clear stock in-house or hire a clearing firm to do so on their behalf. All movements of securities are made to the participant’s account electronically with book-entry adjustments."

Basically transactions can occur more easily on the OTC symbol in the United States. Luckily, I have some experience with this through my largest and longest holding, Peak Positioning Technologies Inc. (PKK.C) (PKKFF). Having seen transactions occur on PKKFF for years under its symbol pre-DTC, I noticed that whenever volume occurred in the United States, a corresponding trade occurred on the CSE. For instance, if there was a buy order transacted on PKKFF for 100,000 shares, I would see a 100,000 share order go through the CSE. The seller would be some kind of traditional Canadian retail broker (TD, RBC, Cannacord etc.) and the buying broker would be more U.S. or International in nature (Merrill, Pershing etc.). It was obviously the same trade that actually took place on the CSE because the OTC had no inventory of shares on the U.S. side. A lack of inventory, while not making it impossible to transact on the OTC symbol, makes it very difficult. 

Obtaining that DTC eligibility is a game-changer for a stock. It's now easier for U.S. investors to buy and sell the stock and therefore increases their demand for wanting the stock in the first place. Coupled with an awareness campaign, this can result in positive near-term performance for the stock price.

One needs to look no further than PKKFF to see what can happen to a stock immediately following DTC eligibility. Peak got its DTC eligibility on September 17. Review the price history for PKKFF for the last several months. Prior to this date, PKKFF was trading at $0.345. Other than September 16 with volume of 175,000, it hadn't seen a day with more than 50,000 shares traded since July 30. Generally speaking, PKKFF would see one or two days a month with over 50,000 in volume and most days with less than 10,000 in volume. A month and a half later, PKKFF is up to $0.60. In the eleven trading days between October 19 and November 2, PKKFF has traded at least 50,000 shares each day and has averaged over 170,000 shares traded during that time. For a 5-digit OTC stock, consistently trading around $100,000 worth of shares in a day is actually pretty good. This obviously corresponds to an increase in price and volume on the Canadian side too.

The increase in interest in Peak hasn't been solely due to the DTC. The company has had a steady news flow since then and has been featured on the Wall Street Reporter's "Next Super Stock". But that's kind of the point. Intelligently run Canadian small cap companies don't just get DTC eligibility for the fun of it. Nor do they try to promote themselves to a U.S. investor audience without it because that endeavour would be a big waste of time if most Americans have to jump through hoops just to try to buy the stock.

MN's CEO Martin Kepman, said the following in today's press release:

"DTC eligibility provides access to a broader base of investors in North America particularly in the US and heightens our visibility in the capital markets thereby improving our share liquidity."

It shouldn't be too hard to read between the lines on this one. Given the legitimate Tesla connection which I have previously outlined as well as the company's latest venture with PureBiotics, this is a relatively easy story to tell to a U.S. audience. 

It wouldn't surprise me if the performance of PKKFF over the last several weeks is like a window into the future for MNXXF.

Thursday 8 October 2020

Datametrex: Playing With A Full Deck In Pandemic Crisis Management

Datametrex AI Limited (DM.V) (DTMXF) is a familiar name to me. At the peak of the cryptohype in 2017 and early 2018, DM was one of the companies deeply immersed in prospective blockchain technology. After that bubble burst, the stock was one of many sent to TSXV purgatory. DM traded under $0.05 for all of 2019 through March 2020. Revenue grew 52% to $3.4 million in 2019, but that wasn't enough to impress a market that had immediate sky high market expectations for blockchain and AI stocks. The company had a net loss of $2.8 million in 2019. These numbers would put it within striking distance of becoming cash flow positive, but likely a round or two of significant financing would have been needed before achieving that goal.

However, the company's fortunes changed upon the COVID-19 outbreak early in the year and some quick maneuvering to try to capitalize on a new opportunity. The stock came back to life immediately after it announced that it secured the rights to import and sell multiple COVID-19 test kits from South Korean manufacturers, trading mostly in a $0.10 to $0.15 range since that time. It has been selling the tests in Canada, Mexico, Latin America and Africa with a focus on mining, and film & TV production industries, education, and governments. Current contracts imply a backlog of $25 million that I anticipate will be fulfilled within a year. Since the initial spike, DM's stock price has been spinning its wheels in this new range despite taking definitive steps towards becoming a true vertically integrated pandemic management enterprise.

DM has a fairly large float of 266 million shares and cheap paper it has to churn through because of the long time it spent at a low price. A recent exercise of warrants and options may have played a part in depressing the stock price, but it as also helped to keep DM's balance sheet in reasonable shape. $1.8 million in cash has come in from the exercise of these securities. Having a large float hasn't stopped other companies like MedMira (MIR.V) - which has 658 million shares outstanding - from going on a major run from $0.01 to as high as $0.89 before settling in the high $0.20's. It could also be that DM has the mark of a bandwagon stock because of its history as a blockchain play that has now converted to a COVID test kit developer. Peers like MIR and StageZero Life Sciences (SZLS.V) have been in the diagnostics business prior to COVID so at least they have experience building similar types of products and having developed appropriate sales channels no matter how small. The market clearly sees these two peers as health care stocks while it's confused as to what exactly DM is as the company tries to meld its two disparate business lines under its corporate umbrella.

DM may be a bandwagon stock; however, it's not so much jumping on a bandwagon, but how a company executes once it has jumped on that latest bandwagon that matters. The TSX Venture is littered with stocks that have all bark and no bite when it comes to jumping on trends. They usually do this in order to secure the next round of financing to pay management salaries. There is no serious intent to grow a profitable business outside of just enough window dressing to keep the market somewhat interested. But DM is showing early proof that it's not one of these type of stocks when it comes to the COVID bandwagon. 

Below is a snapshot of DM's income statement for Q2:

The company achieved just under $2 million in revenue for Q2. This led to a gross profit of $782,000 and a net loss of $868,000. All of these numbers were a substantial improvement over Q2 2019, most of it on the strength of the new COVID test kit business. The COVID business accounted for $1.38 million in revenue for the quarter with $145,000 of that being revenue from a related party. While COVID revenues were the dominant form of growth, note that the cyber security AI portion of the business also saw good growth from a small base. Services and Licensing saw a 58% growth, bucking a downward trend seen in Q1. System Integration and Hardware continued its strong growth, up 69% on the quarter.

Share based compensation was $573,000. This number is derived from the deemed value of stock options issued for the quarter using the Black-Scholes option pricing model. There are two ways to look at this number. One could think that management and employees have a very generous comp structure on top of salaries. However, the beneficiaries of these options only get paid if the stock price goes up. The other way to look at it is that on a cash flow basis, DM is a lot closer to eliminating the burn rate than what net income numbers imply. When excluding the share based comp, the net loss for Q2 is actually much lower at $295,000. Very much within striking distance of breakeven operations. As seen in the Q2 financial result press release, EBITDA was less than a $100,000 loss. 

In contrast, SZLS reported just $100,000 in revenue for its Q2 ended June and MIR reported just $87,000 in its Q3 ended April. Despite that, SZLS trades above DM's market cap while MIR trades at several times DM's market cap. An investor might be more attracted to a company that develops its own COVID-19 test rather than one that resells a test from another developer, but just by looking at the numbers, DM appears to have the far more successful business model that still runs at a decent gross margin. The businesses that will be the most successful in garnering COVID revenues will be the ones that can execute quickly and profitably.

While DM's business of reselling Korean test kits across the globe has been its primary source of COVID revenues so far, investors can still expect more. The company has a full suite of products for pandemic management and protection. This includes PPE and hazmat suits, hand sanitizer and thermometers. But it appears that the company is moving quickly to expand beyond the medical treatment side of the outbreak and into contact tracing by using its expertise in artificial intelligence. Monday's press release previewed the development of an advanced statistical model to assess the current state of the pandemic and to monitor COVID-19 hotspots using AI and machine learning. 

The company will be leveraging several social media websites as well as traditional news sources for real-time data on the pandemic and any signs of a new outbreak. It'll also be developing an early alarm mapping system. It will be using automatic text analysis that screens for early warning signs of an outbreak in a particular region in a predictive model. The utility of this data should be clear. It can help hospitals and other medical centers both in the public and private sector plan and refine their resource budgets. This is obviously important as a hospital cannot afford to be understaffed or have too few ventilators. Nor should it have too much of either, should another region be short of supplies. As governments deal with a backlog of COVID testing, data like this can help to avoid testing shortfalls in a certain region. The press release didn't make clear what the company's business model will be with this data, though I can imagine that it can help stimulate sales of the text kits and PPE if DM shows that a certain region will be in desperate need of these items in the near future. 

Datametrex has hit a revenue bullseye by leveraging their internal AI intelligence and blending it with their strong supply and distribution network for high margin selling of different classifications of COVID test kits. The Q2 numbers show early stage evidence of a company that is gaining traction towards building a strong fundamental business model on the back of a timely and very relevant health care opportunity. I look forward to providing updated analysis upon release of Q3 numbers by the end of November.