The Good, the Bad, and the Ugly (August 2024)
To learn more about microcap strategies or the Rivemont MicroCap Fund, check out this post and see the disclaimer at the bottom.
Welcome to your monthly recap of the Canadian microcap market.
Last month, I wrote that the activity level and trading volume remained surprisingly robust in July. Well, the momentum seems to have accelerated in August! Non-resource, growing, and profitable companies continue to do exceptionally well in this market.
August was all about second-quarter earnings, and it was action-packed! Fundamentals continue to be strong for many microcap companies, and those that do well now get rewarded with higher share prices, starkly contrasting with the last few years.
Let's now look at some of the main highlights from last month!
For those who signed up for this newsletter recently, the concept is simple. I feature the news that caught my attention during the previous month after skimming through all the press releases on the Canadian market. Every press release, every single day!
The Good
The flurry of acquisitions in Canadian microcaps continues! OneSoft Solutions (TSX-V: OSS) agreed to be acquired by Irth Solutions, a Blackstone subsidiary, for $113 million (a 42% premium). Nova Cannabis (TSX: NOVC) agreed to be acquired by SNDL, its majority shareholder, for $40 million (a 37% premium). Finally, Givex (TSX: GIVX) agreed to be acquired by Shift4 Payments, a strategic buyer, for $200 million (a 55% premium). While these takeouts provide short-term returns, they're starting to make me nervous about the long-term prospects of the asset class as it gets depleted from some of the best opportunities. At least we know we are fishing in the right pond!
DIRTT Environmental Solutions (TSX: DRT), a leader in interior construction and design, announced a significant repurchase of debentures. Following a series of actions to reposition the company, bring it back to profitability and improve the capital structure, DIRTT entered into an agreement with its largest shareholder to buy back $22.1 million worth of debentures, which are publicly traded, for $0.66 to $0.68 on the dollar, ultimately saving the company over $10 million in principal repayments. Kudos on this highly accretive transaction.
Some of the best earnings reports I've seen came from Zedcor (TSX-V: ZDC), Simply Solventless Concentrates (TSX-V: HASH), and Imaflex (TSX-V: IFX). These companies exceeded expectations, posting strong growth and profitability metrics. It wasn't their first time, either. I get even more excited when companies develop a track record of beating expectations or exceeding their guidance!
Zoomd Technologies (TSX-V: ZOMD) also came out with a monster earnings report. Revenues grew 58% while adjusted EBITDA grew 696% to $3 million in a single quarter (on a $15.6 million market cap). The stock exploded 138% higher on the news.
The Bad
Over the last few months, I noticed a wave of restructurings and bankruptcies in struggling Canadian microcaps. Unfortunately, August was no different. Vicinity Motor (TSX-V: VMC) received demand letters and a notice of enforcement of security from its lenders, followed by an agreement to develop a restructuring plan with creditors. Canada Jetlines Operations (NEO: CJET) filed a notice of intention to make a proposal under the Bankruptcy and Insolvency Act (Canada) and ceased all operations. Finally, Jack Nathan Medical (TSX-V: JNH) received a loan from Walmart Canada, its secured lender, while it pursues strategic alternatives to raise more financing or wind down the business.
Premier Health of America (TSX-V: PHA), a provider of outsourced healthcare services (primarily nurse placement), reported sluggish Q2 financial results. PHA's Quebec-based agencies took a hit following the implementation of a new bill in Quebec, which restricts the use of independent labor in the public healthcare system. Gross margins were under pressure, and EBITDA almost vanished. The problem here is the significant debt load of $48 million on a market cap of only $20 million before the announcement. Trouble could be brewing without meaningful EBITDA or the ability to raise equity. The stock collapsed 47% on the day of the announcement.
In the absence of a "confusing" category, I'll leave this one here: Zentek (TSX-V: ZEN), an intellectual property technology company, announced an upsized private placement and a share buyback program on the same day, less than two hours apart. The company is raising capital by issuing shares and is looking to buy back shares because management believes they're undervalued. I love sound capital allocation.
The Ugly
INEO Tech (TSX-V: INEO) announced a $4 million financing to a single investor, resulting in the investor owning 52.7% of the company. This massive dilution is happening close to the all-time low in stock price at $0.05 per share. I've been very interested in INEO over the last several years and thought the company had tremendous potential. Still, a lack of profitability and unconstrained dilution can kill even the most promising opportunities. A regrettable turn of events here…
Replenish Nutrients (CSE: ERTH) published its financials and started by mentioning that the demand for its fertilizer products was robust, with "consistent and growing purchases from existing and new customers." However, seasonal demand due to weather and crop types led to revenue fluctuations. No big deal, just some lumpiness, right? As you go down the press release, you get the delightful surprise that revenues were down 79% year-over-year. It's so lovely to have a consistent and growing customer base!
That's all for this month, everyone. I hope you enjoyed it!
Did I miss anything? Let me know in the comments which news or earnings reports caught your attention!
Disclaimer
This publication is for informational purposes only. Nothing produced under the Stocks & Stones brand should be construed as investment advice or recommendations. Mathieu Martin, the author, is employed as a Portfolio Manager with Rivemont Investments. This publication only represents Mathieu Martin’s own opinions and not those of Rivemont. Rivemont may own positions and transact on any securities mentioned in this publication at any time without prior notice. At the time of this writing, the Rivemont MicroCap Fund holds shares of OneSoft Solutions (TSX-V: OSS) and Simply Solventless Concentrates (TSX-V: HASH), and warrants of Givex (TSX: GIVX) and INEO Tech (TSX-V: INEO). Always do your own research and consult a professional before making investment decisions.
If you’d like to invest in small public companies, check out this post.
I really enjoy these posts, great work Mathieu