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.