The Good, the Bad, and the Ugly (October 2024)

To learn more about microcap strategies or the Rivemont MicroCap Fund, check out this post and see the disclaimer at the bottom.

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Welcome to your monthly recap of the Canadian microcap market.

I'm starting to feel like a broken record, but October was another solid month for profitable microcaps! This subset of companies is challenging to track in aggregate because so many natural resources companies are included in the Canadian indices. I like to think that the Rivemont MicroCap Fund I manage is a decent proxy for growing and profitable Canadian microcaps. If you’d like more information about the fund, feel free to reach out. The fund returned 9.6% in October, reaching + 77% year-to-date!

There were two acquisitions this past month: ZoomerMedia (TSX-V: ZUM) for a 167% premium and FLYHT Aerospace Solutions (TSX-V: FLY) for a 41% premium (more on this one below). I feel like the pace of M&A transactions has been slowing down a bit as valuations have increased across the board.

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

1. Firan Technology Group (TSX: FTG), an aerospace and defence supplier, announced solid quarterly financial results. Revenues were up 18%, adjusted EBITDA was up 45%, and net earnings were up 109% year-over-year. The company also announced the acquisition of FLYHT Aerospace Solutions (TSX-V: FLY) for approximately $0.34 per share, a 41% premium to the last closing price. FLYHT had been struggling financially over the previous few years and had seen its share price decline over 90% from peak to trough. The acquisition looks very strategic and opportunistic for Firan. Assuming a smooth integration, which Firan has a solid track record of doing, FLYHT could become a profitable asset under Firan's ownership.

2. California Nanotechnologies (TSX-V: CNO) came out with another jaw-dropping financial report. Quarterly revenue and adjusted EBITDA were up 122% and 177%, respectively, year-over-year. The comments in the press release also suggest that the next quarter could be another record. That's execution at its finest!

3. Kraken Robotics (TSX-V: PNG) released solid news during the month. First, the company announced a $25 million bought-deal financing, which was then upsized to $45 million due to overwhelming investor demand. The deal closed at $51.75 million, including the over-allotment option. It is bullish for Kraken and the microcap asset class in general to see such a strong level of appetite for a financing. The company also announced $13 million in subsea battery orders from existing customers. The stock has been on a tear lately, increasing 14% in October and 208% since the beginning of the year.

The Bad

1. The gong show at AnalytixInsight (TSX-V: ALY) might be nearing its end. If you're unfamiliar with the situation, I highlighted the company in my April edition of the Good, Bad, and Ugly. After reaching a settlement with three directors in September, ALY's CEO provided a comprehensive business update in October. It was not pretty. The amount of value destruction over the last several years is quite shocking. At least shareholders now know what is happening and can make educated decisions.

2. Ynvisible Interactive (TSX-V: YNV), a developer of low-cost e-paper displays, announced a $500,000 private placement at $0.10 per share while it still had over $5 million in cash and no debt on its balance sheet at the end of its last quarter. Four days later, the company's CEO published a shareholder letter highlighting how the stock's current valuation did not reflect its full potential and that it intended to enter into an investor relations and marketing program to build investor awareness. Why would they raise unnecessary capital if their stock is undervalued? Oh, I forgot to mention that insiders participated in the financing just before embarking on the IR program. What a coincidence!

3. I was unsure which category to put this one in. On October 15, the shares of Bright Minds Biosciences (CSE: DRUG) went parabolic on seemingly no news. And when I say parabolic, I mean a 25 times increase (2,500%) in one day. Apparently, one of their peers in the US developing a similar drug was acquired the day before for $2.6 billion, and US hedge funds immediately jumped on Bright Minds. The stock went on a crazy run, reaching a high of $108 per share from only $1.64 a few days prior, a 65-bagger in four days. The company immediately arranged a fully subscribed US $35 million financing, and the CEO unloaded $12 million worth of stock in the market at $40 per share. It's still unclear whether this is legit or another pump & dump. I guess time will tell. In the meantime, this one has been pretty captivating to watch.

The Ugly

1. It was a record month for bankruptcies in the Canadian microcap market, as access to capital remains challenging for struggling issuers. Notable failures include Valeo Pharma (TSX: VPH), Arht Media (TSX-V: ART), Vicinity Motor (TSX-V: VMC), Statehouse Holdings (CSE: STHZ), Select Sands (TSX-V: SNS), Chesswood Group (TSX: CHW) and Earth Alive Clean Technologies (TSX-V: EAC). In a similar vein, Axis Auto Finance (TSX: AXIS) announced a business liquidation (leaving nothing for shareholders), and Oceansix Future Paths (TSX-V: OSIX) announced a strategic review process. The market is cleansing itself.

2. Remember Reliq Health Technologies (TSX-V: RHT)? They'd been caught billing uncollectable invoices and recording false revenues in 2017-2018. A few years later, their CEO, Dr. Lisa Crossley, started promoting the stock again by touting how Reliq would become a billion-dollar Nasdaq-listed company. Well, it didn't exactly work out as planned. The company experienced delays in filing its 2023 financial results, followed by the unexpected resignation of Dr. Crossley in late 2023. The stock has been halted since January 2024, and no financials have been filed. Something smelled fishy. The other shoe finally dropped recently when Dr. Crossley filed hundreds of insider transactions on SEDI covering 2021 to 2023. She exercised millions of options and actively traded the stock in the market, including on days before earnings releases, without ever disclosing it. She was publicly pumping the stock and misleading shareholders while cashing in on what looks like millions of dollars of profits. I am absolutely disgusted by this kind of misconduct…

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!

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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 positions in Firan Technology Group (TSX: FTG) and Kraken Robotics (TSX-V: PNG). 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.