SoundThinking, Inc. (SSTI)

Website
Yahoo Finance

Oct. 31, 2024
Q2 2024 Data
Price: $11.00, Shares: 12.78m,  Cap: $140m. 

Summary
(1) A unique gunshot detection technology company with almost no competition has enjoyed fast growth for many years. 

(2) There have been anti-surveillance and pro-equity movements against the company since 2021 which created very negative publicity for the company. This caused it to lose some contract renewals and the stock price has been down significantly. 

(3) The doubt about the accuracy of the gunshot detection is valid. However, the product has been proven to be very valuable to the communities that are using it. 

(4) The current valuation of the company is less than 15x of its real earnings. It is a very attractive price once it recovers from the temporary setback. 

Business
(1) History 
The company was founded by Dr. Robert Showen in 1996. He invented the technology to track gunshots by using acoustic microphones. Gary Lauder, the grandson of  Estee Lauder, liked the idea and invested through the years to support the adventure. The company didn't do well financially in the early years. In 2010, Ralph Clark joined the company as the new CEO. He transformed the business into a SaaS-based model. Since then the business took off and generated over $12m in revenue in 2015.

It achieved around $24m in revenue in 2017. By then it had raised around $70m from private investors including $20m from Gary Lauder. It IPOed in the same year and raised $32m at $10/share which valued the company at over $100m.  

It grew very well for the next several years, especially during the pandemic, also partially due to the help of some government funding. 

Since 2021, there were several negative reports of the company appeared. Mainly question the accuracy of its gunshot detection, concentrated deployment of its sensors on black and color communities, and privacy concerns. Despite this, it still did quite well and achieved over $90m in revenue in 2023.

In May 2024, Houston's mayor declared it would not renew Shotspotter's contract, which expires in 2027. Currently, the city pays SSTI $700k/year. 

In Sept. 2024, Chicago's major officially canceled the city's contract renewal with SSTI which will cost it to lose around $9m in revenue annually. The service ended in Sept. 2024. There were quite some fights between the mayor and the city councilors over whether to keep the service. 

(2) Product & Services 
ShotSpotter gunshot detection: 
It uses multiple acoustic microphones to track the same gunshot and triangulate the location of the gunshot. Once a gunshot alarm is triggered, it will be sent to the local police department and processed by the police force. 

False Positive: The system triggered a gunshot alarm but actually it is something else like a firework sound or a backfire of a car. 

False Negative: There is a gunshot within the system geographic but the system failed to trigger a gunshot alarm. 

According to the company, the accuracy of the system is defined as real gunshots identified( total alarms-false positive) divided by (all alarms + false negative). It usually has a guarantee of 90% accuracy in its contracts. 

In the main investigations done by the critics of the company, they found over 80% of the company's alarms lead to a dead end. The police can't find any evidence of a gunshot and file no case. They argue that the system is not working and wastes police resources. 

There are also concerns about the concentration of its audio censors on black and color communities which causes over-policing in those areas. To a lesser extent, there are worries about it being able to record people's conversations.  

Revenue from ShotSpotter usually is charged by sq. mile. The price ranges from $65k to $90k per sq. mile. The cost of equipment deployment per sq. mile should be less than $65k, Currently, ShotSpotter counts for around 73% of its total revenue. 

SafePointe: 
Weapons Detection using metal detectors that won't slow down traffic. Acquired in 2023 for $25m( $11m in cash + $11m in stock + $3m in earnout). Revenue for safepointe is charged on a per-lane basis. At the time of the acquisition, it generates around $3.6m ARR on around 200 lanes. Indicates an $18k/lane price.  It expects to generate $7.6m ARR for SSTI in 2024 which indicates over 400 lanes will be under contract.  However, it stated there were only 158 lanes under contract at the end of Dec. 2023. At the end of Q2 2024, there are 179 lanes under contract.

CrimeTracker( Originally called COPLINK X from Forensic Logic):
Crime search engine. Acquired in 2022 for $4.9m cash + $14.3m in stock + $20m in earnout for 2022&2023. None of the earnouts were paid in those two years because the targets weren't met.  Currently, CrimeTracker contributes less than 10% of its total ARR. 

Case builder(Originally called CrimeCenter from Leeds, LLC. Shown as Technology Solutions below):
Investigative case management software was acquired in 2020. Paid 14.6m cash + $2m in stock + $5m earnout. 





(4) Seasonality 
It has no obvious seasonality. 


(5)Employees


2. Management
(1) Management
Ralph Clark: CEO. Previously he had led several businesses as CEO or CFO and did very well.


(2) Ownership and Compensation
Gary Lauder: 2.25m shares, 18%
Ralph Clark: 690k shares, 5%
All major shareholders and insiders together own around 55%. 

3. Financial data

Notes: debt
Debt:  Debt is around 7m in Q2 2024. It paid down another $3m after Q2. 


Notes: Share Data
10m shares at IPO time of 2017. Raised some smaller amounts through the years. Current shares outstanding 12.8m.  
Options: 1.8m. Average price $26.
RSUs: 1.1m.

4. Valuation and comments
(1) The chance for police to find evidence in a non-victim gunshot event is low by nature. Its real false positive rate might be somewhere below 50%. It might sound bad, but compared to the false positive number, the false negative number is even more important. The missing of catching a real gunshot is worse than the waste of police time investing in a false alarm.

(2) There are 3 major benefits of the gunshot detection system: a) Enables the police to investigate gunshot events while no one calls the 911. b) The alarm is triggered earlier than 911 calls. c) It provides the accurate location of the gunfire.  In many cases, the system has helped to save the lives of gun victims. 

(3) The fast response from the police most of the time makes people feel safer. The privacy and over-policing concerns are exaggerated. Overall the system is welcomed by the communities that adopted it. Although the police procedure of handling the gunshot alarm could be improved. 

(4) The data collection of its system is not good. The company could do way a better job of improving it and providing independent research reports on its system's accuracy.  

(5) The 3 acquisitions are quite expensive.  I feel they didn't perform as well as the company had wished. SafePointe might be the only one that has some potential. As they account for close to 30% of total revenue, they provide some hedging against the revenue concentration risk of ShotSpotter. 

(6) Currently, the company is trading around 1.4x of its annual revenue and less than 15 times its FCF. It is acceptable if the company can maintain existing revenue and profit levels. Obviously, the market is expecting it will get worse. 

5. Risk
(1) The negative publicity will affect the company's business for quite some time. It is unknown how bad this could turn into. It is very unlikely but is still possible that it might lose its NYC contract as well.

(2) There could be more investigations and accusations of its system. If the system is proven to be very inaccurate, it sure will lose customers' confidence. 

6. Conclusion
This company has been managed well and its product is valid and useful. The current price is very acceptable if it can navigate through the headwind. The risk of going downward further shouldn't be overlooked. It should be monitored very closely. 

7. Links










Posted by

Hour Loop, Inc. (HOUR)

Website
Yahoo Finance

Sept 23, 2024
Q2 2024 Data
Price: $1.43, Shares: 35m,  Cap: $50m. 

Summary
(1) A fast-growing Amazon third-party seller has experienced a hiccup in profitability in the last 2 years. It is expected to continue to grow its revenue significantly in the next several years. 

(2) Profitability has recovered in the last two quarters. It is more than likely that it can maintain a similar profit level or even better going forward. The stock is traded around 10 P/E based on the current profit projection. 

(3) The very limited public float(1.75m shares) number makes the stock only suitable for small investors.

Business
(1) History 
The company was founded by Sam Lai(赖勇全) in 2013. By then, he was still an Amazon engineer. It was created for him to gain some knowledge of Amazon selling. Surprisingly, the business did very well and by 2016 it had achieved $7m in revenue. In 2017, he quit his Amazon job and solely worked on the business. It grew very fast to $24m in revenue in 2019. It self-funded all of its growth with almost no capital injection.
 
In 2020 and 2021, benefited from the Covid lockdown, the business achieved a great result both on the top line and the bottom line. It made around $8m in net profit in these two years.
 
In early 2022, the company did a traditional IPO and listed on Nasdaq. It raised a modest $6m dollars at $4/share.
 
In late 2021, severe supply chain issues caused the company not to have enough inventory to sell. In 2022, the supply chain issue is still there. The company built a very high inventory in the first 3Q preparing the holiday season. However, many Amazon sellers did the same thing, and the sales in Q4 were not as good as expected, the company's margin compressed by 7% vs the previous year. At the same time, Amazon hiked its FBA(Filled by Amazon) fees significantly. Also, it incurred higher costs as a public company. It swung to $2m in losses in 2022.

The situation lasted all through 2023. Compared to 2021, its margin is almost 5% lower in 2022 and 2023, and its selling expense is almost 5% higher. Its losses widen a little bit in 2023.



However, by the end of 2023, it was able to reduce its inventory to a much lower level. Also, Amazon's FBA price went down a little bit. In the first 2Q of 2024, the company's margin improved significantly although its selling expense is still quite high. It generated around $2m in real income for the first half. 

(2) Product & Services 
1. Products
The company's major categories are home decor and toys. Many of those items are quite unique and around $20 to $30.  

Currently, it manages around 100k SKU's. 
Vendor number: 2020: 226. 2021: 300? 2022: >700. 2023 +150?

2. Revenue and gross margin
Shipping goods from the manufacturer to its warehouse is included in the cost of goods. Also, the estimated return is deducted from total revenue. 

3. Selling and Marketing Expenses
It is pretty sure that all the fees the company paid to Amazon are included in the selling and marketing expenses which range from 38% to 47% in the last 3 years. I am not sure whether the customer support cost is included there. Currently, the selling and marketing expenses are still quite high. 
 

(3) Industry


Amazon's Total Seller Fees


"According to P&Ls provided by a sample of sellers selling on Amazon.com and using FBA, a typical Amazon seller pays a 15% transaction fee (Amazon calls it a referral fee), 20-35% in Fulfillment by Amazon fees (including storage and other fees), and up to 15% for advertising and promotions on Amazon."




Competitors:
There are 3 different big Amazon marketplace sellers:
a) Amazon Retail: The products that are sold by Amazon itself. Usually, Amazon offers the lowest prices which makes it hard to compete against. 
b) Private label sellers: they sell their own products and HOUR doesn't compete with them. 
c) Third-party sellers: they are direct competitors of HOUR. However, among the top 20 sellers, they all focus on different niche product categories. No seller sells in the same decor and toy categories. However, some sellers do overlap HOUR's categories. 

(4) Seasonality 
Based on the last several years, the last quarter of the year accounts for up to 50% of its annual sales. However, in Q4 the SG&A expense is also much higher. Thus its profit in Q4 might just be a little better than the other 3 quarters. The first 3 quarters are at a more similar lower level. 

(5)Employees
178 at the end of 2023. 

2. Management
(1) Management
Sam Lai: CEO. He worked for Aamzon for many years as a developer before 2017. His bonus compensation is tied to the profit the company achieves in a given year. 
Maggie Yu: SVP. She is Lai's wife who is also a computer graduate. Her bonus compensation is tied to how many vendors the company acquires in a given year.

(2) Ownership and Compensation
Sam Lai & his wife own around 33 million shares. Around 95%. Each of them has a compensation of around $0.5m + bonus.

3. Financial data

Notes: debt
Debt: At the end of Q2 2024, it has 3.3m in cash and 2.9 m+4.2 m in debt. The 4.2m was provided by Lai and his wife. Originally they were the distributions from the company to them at the time of the IPO. They lent them back to the company for free.  Now they carries around 3% in interest.

Notes: Share Data
In 2023, 35m shares are outstanding. Only around 1.75m are in public float. 

4. Valuation and comments
(1) The company generated tremendous growth since the beginning. Its revenue still growing at a very fast pace. On the other hand, it didn't generate much profit except during the first 2 years of the pandemic. Still, it is very impressive that all of the growth was almost fully self-funded. 

(2) I view the 2022 and 2023 hiccups are related to over-stocking and supply chain issues. Going forward, it is unlikely to experience those same issues again. 

(3) The company should be able to achieve at least 5% in net income as it scales up and becomes more efficient. Currently, it is traded less than 10 times normalized earnings which is very cheap given the high growth rate it achieved. 

(4) The public float is too few for it to actually be a public company. I don't really understand the management's intentions here. Wish it could issue more shares or release some of their own shares. 


5. Risk
(1) It is in the retail business which means the macro economy will affect its business quite a lot.  Overall, since most of the products it sells are low price items, it won't be as bad as those consumer durables or luxury house items. 

(2) Its revenue is almost all from the Amazon US site. Obviously, if something happens on Amazon, it will greatly affect its business. However, it is a very low probability that its business will suffer a hard stop. A more reasonable scenario is that Amaozon's policy or price change will affect its profitability. This had happened during the 2021 to 2022 supply chain shortage period. 

(3) The competition on Amazon is always tough. If some competitor decided to compete directly in HOUR's category, it could lose its competitive advantage and become less profitable or even lose money. 

(4) Generally the CEO family's interest is aligned with shareholders. However, since the public float is too low, the share price doesn't really matters to them. Also, he is more of an engineer than a CEO. 

6. Conclusion
This company is unique with high growth potential and very low public float. The price is very cheap and it is good for small investors. The business might be cyclical and it solely relies on a single platform. Should be watched closely. 

7. Links










Posted by

Goldmoney Inc. (XAU.TO)

Website
Yahoo Finance

July 17, 2024
Q4 2024 Data (Year end: Mar. 31th)
Price: $7.80. Shares: 13m,  Cap: $102m. 

1. Business
(1) History 
The company was founded in 2014 by Roy Sebag. It is originally called BitGold Inc. It is a company that tries to monetize gold as currency. It was IPOed in 2015 through a reverse merger. In 2015, BitGold acquired GoldMoney for $52m all in stock.  GoldMoney is a gold and precious metals vaulting business founded in 2001 by James Turk and Geoff Turk. Soon BitGold changed its name to GoldMoney Inc. 

From 2016 to 2019, the company acquired Schiff Gold, and Mene, entering crypto trading etc. However, none of them seems to be successful. Schiff Gold has been sold back to its original owner. Mene has been spun off and became a publicly listed company. Crypto trading has been discontinued. The main metal trading business didn't grow its asset bases during those years. The trading volume seems low as well. As a result, the company burnt around $30m in cash in those years. 

Since 2020, benefited from the Covid shutdown, its trading volume is up. Also, the company implemented minimum storage fees, inactive and dormant account fees, etc through the years. It started to make money. For the four years period, it had made over $50m. However, because of the high fees and the discontinuing of the prepaid card. Its managed assets started to outflow. By the end of fiscal 2024, gold under its management lost by 30% from its peak, and silver under its management lost by 20%. 

In fiscal 2024, as the interest rate gets higher, the company shifts its precious metal holding to real estate. It bought 3 properties in the UK and generated around $6m in rental. It also incurred 40m in mortgage debt. It is expected to generate more rentals in fiscal 2025. 


(2) Product & Services 
1. Precious Metal Segment
Trading commission:
0.5% of the value of the metal that is traded. This revenue is highly tied to trading volume. Before 2019, the company counted the value of all the metals that had been bought or sold as revenue. Since 2019, it has counted the value of all the metal that has been bought plus the commission it got when customers sell the metal back to the company and other commissions as revenue. 

Storage fee:
Gold: 0.12% to 0.20% per year depending on the vault location. The cheapest are London and Zurich which is 0.12%. It doesn't make sense for anyone to choose other high-fee locations. It introduced a $10/m minimum storage fee in 2020 if the calculated storage fee is lower than $10. This makes anyone who holds less than $100,000 in metal pay higher than a 0.12% storage fee.

Inactive fee & Dormant fee: 1%&0.75% annually. 
Before 2024, the trading commission was counted in revenue while all the fees were counted separately as fees. Since 2024, all margins and fees have been counted in revenue.

2. Real Estate Segment
Currently, it owns 3 office buildings in the UK. 


3. Discontinued and other
Schiff Gold
Nov 14, 2016, It acquired Schiff Gold LLC (“SGL”) from Peter Schiff for 1,063,000 common shares of Goldmoney plus some warrants. Schiff Gold was founded by Peter Schiff. It sells gold and silver coins and bars etc. On September 26, 2023, SGL was sold back to Schiff's for 212,600 shares( after a 5 for 1 split), and all the warrants were issued in 2016. 

Mene was founded in 2017 by Roy Sebag as well. It aimed to enter the jewelry segment. The company soon acquired it with stock.  In Oct. 2018, Mene was spun off and listed on TSXV through a reverse merger. XAU soon distributed 4m Mene B shares as dividends to its shareholders. Currently, the company still holds around 36% interest in Mene. The market value of its Mene shares is around $10m.

GoldMoney Prepaid Payment Card
It was launched in Nov. 2015. The purpose of this is to make the gold holding act as a back of the user's daily cash usage. It was discontinued in 2020. I guess it is related to regulatory issues.

Crypto Trading
It entered crypto trading briefly which it trades crypto the same way it trades precious metal. It discontinued it in 2019. 

(4) Employees
35 employees in 2016 and 27 employees in 2024. 

2. Management
(1) Management
Roy Sebag: A successful value investor who specializes in distressed assets. Later, he got interested in precious metals and mining. In 2015, he founded both the BitGold and the Mene Inc.

(2) Ownership and Compensation
Roy Sebag: owns around 3.8m shares. 30%.
Before fiscal 2021, he only took a $1 cash salary plus stock options. In fiscal 2024, his cash salary was raised to $250k+ $500k bonus. 

3. Financial data

Notes: debt
Debt: $40m mortgage debt carrying interest at around 5.6%.

Notes: Share History
In 2023, it did a 5 for 1 reverse split. 

Notes: Share Data
After the 5 for 1 reverse split, it has around 13m shares outstanding.

4. Valuation and comments
(1) Although its clients had pulled out their assets from the company, the asset value under its management had held steady through the years thanking the appreciation of the precious metal price. It is expected to generate a similar amount of storage fee revenue in the next few years. It should range from $10m to $15m per year.

(2) The trading volume is very volatile from year to year. It is really hard to find the real trading volume. Overall, it seems rising precious metal prices will generate higher trading volume.

(3) Based on the current RE holdings in the UK, the company is expected to generate around $11m/year in rental revenue. Offset by the $2m interest expenses, the net rental income is around $9m/year. 

(4) The current annual expense for the metal segments is around $2.5m. Corporate expense is around $5m/year. Removing all the expenses from the revenue mentioned above, it is expected to generate around $14m to $24m pretax income per year. The current CapX and tax are very minimal. The current market cap of $100m is very cheap. 

(5) The tangible book value excluding Mene stocks is around $105 which is over the current market cap. The Mene stocks it holds are currently worth around another $10m.

(6) The company's financial reports are often inconsistent from year to year. This makes it hard to understand its business. It is impossible to figure out its real trading volume which is very important for the business. 

5. Risk
(1) The company didn't manage the precious metal business well. The fee raising made its customers very unhappy. The trading volume of precious metals is very volatile. Its revenue from this segment will continue to fluctuate. Overall the precious metal segment is going downward. Eventually, the company might have to wind down the business. The revenue stream from this segment will die out. 


(2) Regulation or litigation issues could incur in the precious metal segment. I suspect the discontinuation of the prepaid card and the crypto trading might well be caused by regulatory reasons. 

(3) The real estate investing strategy might not be working. There could be unexpected issues like the rental could be interrupted if the tenants terminate contracts early. 

(4) It is hard to analyze the financial reports of the company. Information might not be fully understood. 


6. Conclusion
Although the precious metal business is not doing well, the company is still expected to generate very stable income for the next several years. Adding income from the rental business, it is worth much more than the current market cap of $100m. 

7. Links










Posted by

Andrew Peller Limited (ADW.A)

Website

Yahoo Finance

June 10, 2024
Q3 2024 Data (Year end: Mar. 31th)
Price: $3.90. Shares: 43m,  Cap: $172m. 

1. Business
(1) History 
Andrew Peller, a Hungarian immigrant, created the company in 1961. Originally, it was a winery in Port Moody, B.C. called Andrés Wines. It started to build wineries across the country. Andrew’s son Joe, a medical doctor, joined the family business to help his father grow the business and he eventually succeeded his father as President in 1966. 

In the 1960s, low-alcohol sparkling wines became very popular in the U.S. The company went public in 1970 and launched the 7% "Baby Duck" sparking wine. It was a great success with 8m bottles sold in 1973. Following the success of the Baby Duck, the company launched more value wine brands during the 1970s and 1980s.

In 1989 Joe’s son John Peller joined the company and became the CEO in 1995 until today. In the 1990s, the company shifted its strategy to the premium wine categories. It also increased its iced wine and imported wine sales. At the same time, it made acquisitions in wine yards, retail wine stores, home wine-making kits, etc. By fiscal year 1998, it had grown to over $100m in revenue.  It hit $200m in revenue in fiscal year 2006. The company's name was changed from Andrés Wines to Andrew Peller Limited in 2006 to honor its founder. For the 13 years since John took over the CEO role(1995) to 2008, the company grew its revenue from $70m to $244m and its net income from $4m to $11m.
 
Since fiscal year 2009,  as the U.S. financial crisis began, the company's margin dropped from over 40% to 37%. The company paused acquisitions and cut down its CapX. Its revenue continues to grow but at a slower rate for the next few years.  In fiscal 2016, it generated $334m in revenue and $19m in net income

It started capital investing again in 2017 by opening the Wayne Gretzky Estate Winery.  In fiscal year 2018, it acquired 3 estate wineries for $77m. Its margin moved back to over 40% in 2018. By fiscal 2021, into the first year of the pandemic, its revenue topped $391m and net income topped $27m. However, for the next 2 years, it suffered again with high material and international freight costs, along with the reduction of the winery and restaurant sales.  Also, it had to pay much higher interest on its $200m+ debt as the interest rate rose. If not for the help of the WSSP program, it could have lost around $10m in fiscal 2023.

For the fiscal year 2022 and 2023, it generated around $30m in real operating cash each year. In both years it spent over $20m on CapX, coupled with $15m in negative working capital changes mainly from high inventory costs. It has to borrow money to pay its dividend. Its debt rose from $175m at the end of fiscal 2021 to $213m at the end of fiscal 2023. If not for the $18m it received from the WSSP program in Q4 2023, it could be much worse.
    
For the first 3Q of fiscal 2024, the company was able to work through some of the high-cost inventory. With the help of the WSSP funding, it was able to pay down $14m in debt. However, the margin is still low. 

During the pandemic, both the icewine export to China and the sales made to tourists from China were greatly reduced. As the pandemic ended, none of the sales have recovered yet. 


(2) Product & Business 
Wine brands:
*IDB: Peller Family Vineyards, Copper Moon, Black Cellar, and XOXO.
*premium and ultra-premium VQA: Peller Estates, Trius, Thirty Bench, Wayne Gretzky,... Etc.
*Value IDB: Hochtaler, Domaine D’Or, Schloss Laderheim, Royal, and Sommet
*VQA icewine: Mainly for export.

Whisky brands: Wayne Gretzky No. 99

Winemaking products: Global Vintners Inc. (“GVI”): 

Retail stores: 101 stores including The Wine Shop, Wine Country Vintners, and Wine Country Merchants

Wine import: Andrew Peller Import Agency and The Small Winemaker’s Collection Inc

Winery Retail & Tour: 3 in BC and 4 in Ontario. 

Restaurant & Inn: Peller Estate Winery Restaurant, Riverbend Inn.

Others:
Port Moody property: 5 acres of land 30 minutes from Vancouver were approved for a condo project in June 2023. The property is estimated to be worth around $50m to $100m. 

(3) Industry
VQA(Vintners Quality Alliance) wine: Higher quality wine, 100% Canadian grapes. Around 10% of wine market(Ontario)
IDB(International Domestic Blends) wine: Can contain up to 75% of imported grape content. Around 30% of wine market(Ontario)
Imported wine accounts for around 60% of total wine consumption in Ontario.

Competitor:
Arterra Wines Canada: The largest winemaker in Canada which used to be called Vincor. It was acquired by Constellation Brands in 2006 and later was bought back by the Ontario Teachers’ Pension Plan in 2016. According to ADW, it has an 11.1% share of the English Canada market vs 8.5% by ADW. 

Excise tax
Previously the Excise tax on wine was exempted. As a settlement between Canada and Australia, Canada resumed excise tax on wine produced in Canada in 2022. The current tax rate is $0.353/liter for alcohol <=7%, and $0.735/liter for alcohol>7%.

WSSP(Wine Sector Support Program)  
The program was introduced in 2022 to help Canada's winemakers. It was extended for 3 years in 2024 to Mar. 2027. 

Retail expansion of alcohol products: Ontario will expand sales of alcohol products to convenience stores, supermarkets, etc. no later than January 2026. 

(4) Employees
Over 1600 employees. 46 of which are unionized. 550 of which are part-time employees of retail stores.

2. Management
(1) Management
John Peller: CEO since 1995. In late 2023, he announced a plan for retirement within the next 1 or 2 years. The company is still actively looking for a new CEO.
Management's compensation is around half cash + half stock. Total compensation for top 6 management in 2023 is around $4m.

(2) Ownership and Compensation
John Peller: 5.2m A shares + 950k B shares. 
Peller family: 1.9m A shares, around 5%. + 5m B shares, around 60%. 

In total, the Peller family owns at least 10m of total shares( around 23%). And 60% of B shares.

3. Financial data

Notes: debt
Debt: As of Q3 2024, outstanding debt is $201m. The current interest rate is CDOR +2.50% which is around 7.5%. It is a new ABL loan secured by its inventory that was set up in June. 2023. The current inventory value is $193m.

Notes: Share History
In fiscal 1996, the company has around 3.6m A shares + 1m B shares. The Peller family controls 60% of B shares.
In fiscal 2006, the company still only had 3.9m A shares + 1m B shares. Peller family controls 66% of B shares.
In fiscal 2007, it did a 3:1 split. Total A shares:  B shares: 3m.
In fiscal 2017, it did a 3:1 split again. Total A shares: 33.6m. B shares: 9m.

Notes: Share Data
As of Dec. 2023, 35.2m A shares + 8.1m B shares are outstanding.
A shares: non-voting, 115% dividend payment vs B shares.

Notes: Dividend
The current dividend for A shares is 24.6c/year which is around 6.4% based on $3.89 shares price.

4. Valuation and comments
(1) The real net tangible asset value of the company should be worth at least $300m which is significantly higher than the current market cap. Also, through history, the accumulated acquisition it made is over $210m which is higher than its current market cap.

(2) The company intends to use the proceeds from the Port Moody Property to pay down its debt. The target debt level is around $100m level. 

(3) The last two years have been very difficult for the company. It has to deal with high glass bottle prices, high freight costs, higher interest rates, etc.   The company has done quite well compared to other wine companies. 

(4) Lately, the company is trying to cut its annual CapX level to  $15m which is lower than its maintenance level of $20m. The interest cost is around $15m. It has to generate around $30m EBITDA to just make even. 

(5) For the whole fiscal year 2024, it is expected to generate around $10m in real cash. Any WSSP payment and positive working capital change should be able to be used to pay down the debt. It should be around $15m to $20m.

(6) On a normal basis, it should be able to generate 20m+ in income once its margin recovered and its debt has been paid down. A $300m market valuation is well supported on both the income level and the net asset value.

5. Risk
(1) There are concerns about economic recessions in Canada which sure will affect the company. However, based on the past history, it seemed to only affect the business temporarily. Usually, it came out getting better every time. 

(2) The 200m debt with $15m/year interest is quite concerning. But it was better than it looked. The ABL loan is secured on its inventory. The wine inventory usually holds it is value quite well. Plus the company has plenty of asset value to cover the debt. With the help of the WSSP program and lower inventory costs going forward, the debt can be reduced to a much safer level. 

(3) The enabling sales of alcohol products into convenience stores in Ontario will be negative for its wine store retail. Overall, I don't know how big an effect on the company's revenue and profit. 

(4) The sale of the Port Moody Property might take a long time and even require the company to inject several millions of funds into it first. 

6. Conclusion
This is a well-managed company which is suffering a temporary downturn. Both the recession risk and the debt risk are over-worried. The current price is very cheap based on its true asset value or normal earning power. However, it might take quite a while for the company to show signs of recovery.


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Maxim Power Corp. (MXG.TO)

Website
Yahoo Finance

26. 02, 2024
Q3. 2023 Data
Price: $4.3. Shares: 50m,  Cap: $218m. 

1. Business
(1) History 
The company was founded in Jan. 2004, originally it was a partnership called Milner Power Limited Partnership (“MPLP”) which owns the old 150MW Milner coal power plant in Alberta.  From Feb. 2004 to Sept. 2004, the Milner plant generated 616K MWh of electricity at $55/MWh and earned around $7m in net income. The major stakeholders of the MPLP are Bruce Chernoff(35%) and Brett Wilson(35%).

In Jan. 2005, MPLP reverse merged with publicly traded company Maxim Power Corp.(MXG).  The merger valued the power plant at around $88m. The whole MXG was valued at $114m.

From 2005 to 2008, it bought several gas power plants in the US and some small power plants in France. The total cost is over $100m which is mainly funded by two share offerings in 2005 and 2008. 

Those acquisitions did not work as expected. From 2005 to 2014, the company never generated more than $40m in annual operating cash. Almost the same amount of money was spent in CapX. Basically, it didn't generate any meaningful cash in these 10 years. 

In June 2016, Bruce Chernoff took over the CEO role and started to devest its US and France assets.  The company sold its France power plants for 47m Euro. In the same year, it sold all US power plants for US$83m. After that, only the Milner power plan was left. 

Starting in 2015, caused by the low oil price, Alberta's power price dropped to an extremely low level of around $20/MWh in 2016 and 2017. It recovered to $50/MWh in 2018 and stayed at that level till 2020. The company cut its production in 2015 and even suspended it for some period from 2016 to 2018. The Milner plant resumed in June 2018 and stayed in production until it was shut down in 2020 as the newer plant replaced it. From 2015 to 2019, the coal plant lost over $50m in total.

In 2018, it started constructing the new 204MW single-circle gas plant("M2 SC") on the existing Milner plant. The total cost is around 145m. The plant was commissioned in June 2020 and generated 800k MWh of power in 2020. The company became profitable in 2020 but didn't make much money.

In 2021 and the first 3Q of 2022, as the power price rose to over $100/MWh, the company generated over $130m EBITDA in two years. At the same time, the company started to convert the M2 SC plant to a combined cycle gas turbine("CCGT") facility which will reuse the old Milner plant and increase the total M2 capacity to 300 MWh.  Total cost is around $150m.

In early Sept. 2022, the M2 SC was taken offline for the finishing work of the new CCGT project. On Sept. 30th, a fire occurred in the plant which caused delaying of the CCGT project for around a year. In Aug 2023, the M2 CC was finally finished. It generated a small amount of power in Q3 2023. On Oct. 24th, it achieved 270MWh commercial production. In Jan. 2024, Chernoff retired from his CEO role. COO Robert Emmott was promoted as the new CEO.

By Q3 2023, it received 63m from the insurance claim for the fire incident. $23m for the property damage and $40m for profit loss.

(2) Product & Business 
M2 Combined Cycle Gas Plant: The total cost of the 300 MWh power plant was around $300m which is around $1000/kWh. According to the company's presentation, the average cost to build a new CCGT  plant is around $1800/kWh. Other online resources showed that the average cost to build a CCGT is around $1300-$1700/kWh. The cost of the M2 CC is cheaper because it is built on the old coal plant and reused the old generator. 

Currently, the M2 CC has a heat rate of 8.1 which means it consumes 8.1 GJ of gas fuel to generate every MWh of electricity.  It is equivalent to an efficiency rate of 44.4%. The average efficiency of an offshore CCGT is around 50%. There is still some room for the M2 CC to improve its efficiency. 

The gas price has fluctuated from $2/GJ to $5/GJ in the last several years. Based on the 8.1 heat rate of the M2 CC, the cost is around $16/MWh to $40/MWh.

The current Carbon Tax for M2 CC is around $8/MWh. if the efficiency doesn't change, it will increase by around $2 annually until the year 2030 which should be around $20/MWh.

On a normal basis, it could run around 255 MWh capacity which could generate around 2.2m MWh per year. Currently, the fixed cost of running the M2 CC is around $25m/year. Also, there are around 10m annual SG&A.  The company needs to generate a $18/KWh margin to cover the fixed cost. The current maintenance CapX of the M2 CC is around $10m per year. The company has to generate a $23/KWh margin to make it even. 

(3) Industry
In 1996, the Alberta government started to deregulate the power generation market. It created an auction system that auctions off power generation by the minutes. It will pick the lowest price that satisfies the power load. The price will be the price paid to all generators for that minute. 

It also created a government identity called the Electricity Balancing Pool. The pool buys electricity from the major power generators and sells it to the market. This is called the power purchase agreement (PPA). The PPAs lasted from 2001 to 2020. The profit it makes is credited back to electricity users.  It seems that the Balancing Pool greatly affected the market power price. From 2015 to 2020, the power price dropped to as low as $20/MWh which is very unreasonable. In 2016,  several power generators took legal action against the Alberta government to try to terminate the PPAs early. Since 2021, as the PPAs end,  the power price has risen upward sharply to over $130/MWh. It went down since late 2023, currently, it stays around the $90 level. 

The total power plant capacity in Alberta is around 21,000 KWh. The average Alberta Internal Load (AIL) is around 10,000 MWh. Both hydro and wind plants depend on weather and natural conditions.  If running normally, M2 CC counts around 2.5% of total power production in Alberta. 

Based on the 2022 number, Gas plants provide over 70% of total production. While coal plants and renewable plants each provided around 12.5%. Since 2010, more wind plants have been built and accounted for around 12% of total power production in 2023.

There are 40 cogeneration(power and heat) gas plants in Alberta. Total capacity is around 5300 MWh which is around 25% of total capacity. 

There are a total of 9 combined cycle gas plants in Alberta ranging from 73 MWh to 848 MWh. Total capacity of 3000 MWh which counts around 15% of total capacity. 

There are 31 single-cycle gas plants with 1400 MWh total capacity. They are less efficient and incur much higher carbon tax. 

The cost of gas is decided by the AECO-C spot price. I found the company's cost of gas is around 10% higher than the AECO-C spot price. The AECO price is usually lower than the US gas index price. It reached $5 in 2022 but dropped to less than $3 in 2023 and now stays below the $2.5 level.

Notes: Milner plant line loss compensation issue with AESO:

The government body overseeing Albert's power generation is called AESO(Alberta Electric System Operator). In 2005, AESO changed the power line loss compensation formula which seems not fair to the Milner power plant. The company started a long process of legal action. Around 2016, the company won the battle which led to a $53m payment from AESO in 2020($6.4m) and 2021($46m). 

(4) Employees


2. Management
(1) Management


(2) Ownership and Compensation
All major shareholders: over 70%. 
Bruce Chernoff: 35%.
Brett Wilson: 35%. 
Both will own 40% if the debt is converted. 

3. Financial data

Notes: Convertible debt
In 2019, it established a $75m credit facility with Chernoff & Wilson to support the construction of the M2 plant. It carries a 12% annual interest and convertible at $2.25/share to the common share. It drew around $22m from the facility in 2019. By the end of 2020, the debt added to $29.4m. Currently, the annual interest is around $4m. The mature date of the debt is September 25, 2026.

Notes: Share History
Before the 2005 reverse merger, the publicly traded company Maxim Power Corp.(MXG) owns 20% of MPLP. Bruce Chernoff owns 35% and Brett Wilson owns 35%. 

In Jan. 2005, MPLP reverse merged with MXG. MXG issued 220m shares at $0.32/share for the 80% of the MPLP it doesn't own. After the 2005 merger,  it had 356m shares outstanding. 

Both Bruce Chernoff & Brett Wilson owned 76m shares of MXG and both acquired an additional 25m shares of MXG for $8m($0.32/share) from another insider. Each of them owns 101m shares (28%) of the company. The company was valued at 356*0.32=$114m.

In Nov. 2005, the company issued 55m new shares for $35m($0.63/share). After the offering, it should have 410m shares outstanding.  In 2006, it did a 10 for 1 reverse split which brought the total outstanding shares to 41m. In June 2008, it issued 10.2m shares for $66m($6.5/share). In 2008 AIF, it stated 54m shares outstanding. Both Chernoff and Wilson own around 11.5m shares(21%) each. 

In 2018&2019, the company repurchased over 4m of its shares for around $2/share. After the repurchase, the total shares outstanding were reduced to around 50m.

Notes: Share Data
As for Q3 2023:
Shares: 50.5m shares outstanding. 
Options: 2.7m. Price < $3.
Debt conversion: 13m shares potential.

4. Valuation and comments
(1) From 2005 to 2020, the company was doing very badly. To be fair, from 2015 to 2017 the low power price is the main reason for the loss. Still, the business was not doing very well in those years. With the $50m+ compensation from AESO, it is still just made even in those years. 

(2) The M2 SC generated over $100m profit for the company in 2021 and 2022 which is a great investment. The M2 CC is also expected to be a good one as it reduces both the fuel cost and the carbon tax. However, it is unreasonable to expect that the power price will go back to the 2022 level. 

(3) The $30m convertible debt provided by the management seems unfriendly to the shareholders. However, I do view it as fair because if not for the construction of the M2, the company probably have been shut down already. Once the debt is converted, there will be $4m in interest savings. 

(4) If the $30m debt is converted, the market cap of MXG will be $280m based on the current $4.3 share price. The replacement cost of a similar plant is at least about $450m which is significantly higher than the current market price. This gives quite a good base valuation for the company.  

(5) Currently, the power price is still around $100 which is very profitable for the company. If based on a $80/MWh price and $3/GJ gas price, the company can generate around $80m EBITDA per year which makes the $280m cap very acceptable. 

5. Risk
(1) The power price is very volatile which could drop to a very low level. It is expected to drop in future years as some new gas plants will be online soon. However, with the end of the PPAs, it seems unlikely that the price will drop to a level that makes the combined-cycle plant unprofitable. But if it does go under $50/MWh while the gas price is over $3, combined with the new Carbon tax, it will lose money. 

(2) The fuel price fluctuation also affects its profitability. Although it seems the power price usually will be higher to cover the higher fuel cost. 

(3) The Carbon Tax will reach $20/MWh for M2 CC in 2030 which will be a significant cost for the company. It has to face the tougher competition from renewable power plants such the wind and solar. 

(4) There is very little growth opportunity for the company. It seems the management will keep the company as it is for now. 

(5) There could be unexpected events that will cause the M2 CC plant to go offline. 

6. Conclusion
The company is in a good state right now which could generate a lot of cash if the power price remains at the current level. The current share price is very cheap. However, by nature, it is a commodity type of business. The power price and fuel price should be monitored closely. 


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