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Finding The Right Start-Up To Invest In Fast growing companies prioritize growth over profits during their initial growth stage. Many fast growth companies in their infancy are first movers. Initial commercial stage first movers are likely to be traded on the OTC Market. First movers have a competitive advantage. Over the last three years I have been slowly transitioning my investment focus to what is now almost exclusively fast growing OTC micro caps. I want to capture companies with huge potential in their infancy before they become the next Amazon ( AMZN), Facebook ( FB), Google ( GOOG) (NASDAQ: GOOGL), Trade Desk ( TTD), Shopify ( SHOP), Zoom ( ZM), Roku ( ROKU), Square ( SQ), or Twillio ( TWLO). I listed several stocks because this type of stock isn't rare as we live in a period of escalating technology and escalating problems to solve. I want to share what my process is for finding and evaluating potentially dominant companies in the early stages of commercialization. All of the stocks that I mentioned above have experienced sharp price appreciation before becoming profitable, Valuation metrics like P.E. aren't going to be useful in finding a company in its infancy stage with potential for a huge return. I will illustrate my methodology by putting some stocks through my checklist, but first let me share how I mine for my type of stock. Over the last three years I have been slowly transitioning my investment focus to what is now almost exclusively fast growing OTC micro caps. I want to capture companies with huge potential in their infancy before they become the next Amazon ( AMZN), Facebook ( FB), Google ( GOOG) (NASDAQ: GOOGL), Trade Desk ( TTD), Shopify ( SHOP), Zoom ( ZM), Roku ( ROKU), Square ( SQ), or Twillio ( TWLO). I listed several stocks because this type of stock isn't rare as we live in a period of escalating technology and escalating problems to solve. In this article I want to share what my process is for finding and evaluating potentially dominant companies in the early stages of commercialization. All of the stocks that I mentioned above have experienced sharp price appreciation before becoming profitable, Valuation metrics like P.E. aren't going to be useful in finding a company in its infancy stage with potential for a huge return. I will illustrate my methodology by putting some stocks that I've written about through my checklist, but first let me share how I mine for my type of stock. I also search earnings transcripts for management informing shareholders of intent to uplist. Readers should be wary that an S-1 filing or earnings call announcement are not always followed through and some companies that manage to uplist are not able to maintain listing requirements. Selecting Candidates to Invest In I eliminate CBD stocks from my uplist candidates as many CBD stocks have flocked to Nasdaq but some have been unable to maintain listing requirements. I also eliminate development stage biotech companies as I am not able to evaluate their chance of gaining FDA approval. My interest is in companies that have demonstrated strong revenue growth and are in the beginning of commercialization stage. Most of these companies fund their growth by issuing shares. Companies that I consider for my investment have to have a good strategy which includes a product that has undergone proof of concept, a business strategy that has a proven proof of concept, a capable management team, strong partnerships and a large underpenetrated addressable market. Other characteristic that I look for include a clear path to profitability which can't be blocked by too much share dilution, high gross margins and preferably a recurring revenue model. StrategyI lumped together successful product launch, a capable management team, a proven business plan with organic growth boosted by strong partnerships and alliances as criteria for my Strategy Pass/Fail grade. Readers interested in any stock included here can find discussion on the large underpenetrated market opportunity and more overall details in my stock specific articles or respective company investor presentations. mCloud ( OTCQB:MCLDF) is a provider of an in cloud, A.I. enhanced energy asset management system. Through acquisitions, the company has increased the functionality of its platform which has resulted in organic growth consistently exceeding 100%. Acquisitions also have been instrumental in increasing access to customers in new industries. The company's management team has vast past industry experience and has established various partnerships with large shopping mall operators, large office building owners and wind farm operators. Management forecast $70-80 million in revenue for fiscal 2020 prior to the pandemic, about 300% higher than reported for fiscal 2019. First quarter revenue was about $6 million, hampered by travel restrictions due to the pandemic. The company hasn't yet addressed the size of the backlog or how fast they expect to convert their backlog. This is a similar condition that many other companies are operating under and something that investors should keep an eye on. mCloud's customers include business sectors that have been hardest hit by the pandemic such as office buildings and shopping malls. mCloud gets a passing grade for this exercise in reviewing company strategy. VIQ Solutions ( OTCQX:VQSLF) performs in the cloud A.I. enhanced transcriptions services for various industries that require a high degree of accuracy. Management strategy has been acquiring companies and migrating its new customers to its cloud platform. The results are margin improvement from the mid 20% range to presently in the 40% range with a target in the 50% range once migration is completed. Higher margin results has proven management's capability in scaling the business and now the company is adding an organic growth layer with the introduction of new add-on products and white label service. Rather than reinvent the wheel, VIQ partners with three different speech recognition partners and employs staff to improve the accuracy of their service with machine learning, which I believe is a process unique to VIQ and the secret sauce for their success. he company is on a path of revenue growth of 40% or higher for this fiscal year and positive EBITDA of $4 to $6 million. These numbers could be higher in the likely event of another acquisition. VIQ has held up well during the pandemic and gets a Pass on Strategy. Siyata Mobile ( OTCQX:SYATF) offers the only FirstNet approved in vehicle communication device available and sells its products primarily through Tier 1 Mobile Carriers. Siyata entered the U.S. market, its largest addressable market in the second half of last year through partnerships with AT&T and Verizon and others. This has opened the door for partnerships with other companies on a global basis as revenues climb. Siyata hasn't filed its fiscal 2019 report yet but there's been a good indication that first responders have escalated their need and demand for Siyata's devices due to the pandemic. I expect the company to turn profitable this year and give it a PASS on Strategy. FLYHT Aerospace Solutions ( OTCQX:FLYLF) monitors airplane mechanics and location as well as weather data through satellite communication. Management is highly skilled in negotiating being paid in the acquisition of the weather data technology as well as in its relationships with Boeing, L3Harris, government agencies and more partners. I give the company a PASS on strategy although the current pandemic has reduced air traffic and reduced the urgency to pass legislation to reduce pollution and increase airplane fuel efficiency. Duos Technology ( DUOT) conducts railcar inspections with an in the cloud, A.I. enhanced platform. They have a host of other cool products using sensors, the cloud and A.I. DUOT hasn't any partners or alliances that I could find. While they offer several products, the focus has been on the automatic railcar inspection portals in North America where human inspection is still required. Nobody can predict how long it will take to defeat union's opposition to legislative change, which DUOT needs in order to flourish with its automated railcar inspection portals. I've found management to be inconsistent. A year ago the bulk of investor presentations was in how annual recurring revenue would double and grow going forward. I didn't find any mention of recurring revenue in the last earnings call other than expectations are high nor any specifics in the current investor presentation. When I spoke to management about a year ago there wasn't a clear plan, at least from my understanding, as to how recurring revenue for the railroad portals would be charged and my guess is they haven't figured that out yet. I certainly don't blame management for the delays in the just completed quarter but DUOS has endured lumpy quarters due to delays more often than not and I believe that the results are due to a focus on a product that isn't ready for full market deployment. Besides needing legislation, all of the required algorithms to complete a full inspection haven't been completed by DUOT yet. The business plan focus on railcar inspection or lack of focus on other products, the lack of any partnerships/alliances and what happened to the recurring revenue plan question results in a NO PASS on Strategy. OneSoft Solutions ( OTCQB:OSSIF) serves the O & G industry with predictive analyses of pipeline faults through its cloud A.I. platform. The management team has previous experience in running a publicly traded software company and selling it for a profit. They have solid partnerships with Phillips and Microsoft that are almost impossible for any competitor to duplicate. All of their growth is organic as they created their own platform to predict piggable oil and gas pipeline faults. Revenues will grow on a year to year basis as more data is added and additional pipeline mileage monitored, but quarters will be lumpy as customer usage varies throughout the year. The company has a clear path to profitability but is all out on R & D to develop a non-piggable oil and gas pipeline fault predictability product, which would add a much larger addressable market. OSSIF is the only company that offers an A.I. predictive solution for pipelines but there are other competing methods for pipeline monitoring and maintenance. It remains to be seen which method will be the market share winner. OSSIF gets a PASS on Strategy. Zynex ( ZYXI) manufactures and markets FDA-approved electrotherapy devices and related supplies. Management has maneuvered through FDA regulations that competitors have not been able to do. When competitors dropped out, ZYXI bolstered its sales team and lapped up new customers at a vigorous pace. The company has also beefed up third party sales through the use of their existing sales staff to further add revenue. ZYXI depends on insurance companies for payment. An insurance company recently dropped coverage on ZYXI's devices. It could be a sign of further problems with other insurance companies or it could be resolved in the future, but investors should monitor this situation. ZIXY gets a PASS on Strategy, All of these companies are first movers with the exception of ZYXI. ZYXI is a rare bird in that the company has no direct competitor. ZYXI uplisted to Nasdaq in 2019. DUOT uplisted to Nasdaq recently. mCloud has disclosed that they are in the process of preparing a Nasdaq application. VIQ management has stated that they are about a year away from applying for a Nasdaq listing. The remaining companies have not provided any information on their interest or intent to uplist. Revenue Growth and Dilution Microcap stocks tend to fund their growth and acquisition strategy by issuing shares, which can be dilutive to earnings but revenue growth much greater than share dilution is accretive to earnings.
Data compiled from company filings DUOT was the only company that had fully diluted shares grow at a faster pace than revenues, which is a negative. OSSIF is the only company in the group that had lower revenue in 2019 than in 2018 which was due to upfront payments received from new customers in the prior year but not repeated in the latter. OSSIF's 2020 1Q revenue was almost 2x compared to the same period in the prior year. OSSIF is adding pipeline data to its platform and is continues to grow their recurring revenue. Management expects that revenue for fiscal 2020 will be double fiscal 2019 revenue without any new customers. Siyata's key commercialization development was the approval of two U.S. based tier 1 wireless carriers in the second half of last year for sale of Siyata's products through their extensive networks. I expect that Siyata will become profitable this year unless there is more share dilution which will only come about if the company needs funding to fulfill an overabundance of orders. ZYXI is further advanced than the rest of the group in its commercialization and it shows on the rate of revenue growth which remains outstanding Recurring Revenue and Gross Margin Siyata has a very small percentage of recurring revenue. DUOT did not provide what percentage of their earning was recurring revenue. ZYXI does not break out recurring revenue but their accessories are sold on a recurring basis. All of the companies reported high and attractive gross margins
Data compiled by the author from company filings * DUOT experienced delays in fulfilling contracts due to the travel ban. I thought it would be more reflective of what the co. has achieved and used their gross margin for the fourth quarter 2019 instead of the first quarter 2020. All other gross margins are from the last reported quarter for each respective company. Risks The stocks I invest in are generally considered fundamentally unsound by conventional wisdom as was AMZN during its initial stage. The stocks I invest in tend to use debt instruments or dilution to fund their growth. OTC stocks have lower volume and greater spreads than NYSE or Nasdaq stocks creating the ability for a wide swings in share price created by a small amount of individuals. I urge all readers to take all of the above into consideration and doing their own due diligence when considering any stock that I write about. COVD-19 has presented additional challenges to many companies with some being affected more directly than others but nevertheless affecting the entire economy. Conclusion Many people do scans to find high growth stocks. I look for stocks that are serious contenders for uplisting from the OTC to Nasdaq and then evaluate them focusing on strong revenue growth and share dilution that won't block profitability. I prefer recurring revenue, but high margin companies with organic growth are the criteria that I look for. The final cut to make my portfolio is the company strategy which includes capable management that values organic growth and partnerships. Overall Ratings
My goal is not to find the next AMZN but I will be pleased with finding the next ZIXI pre Nasdaq. I am a buy and hold investor and add trading shares on opportunities based on technical analyses. DUOT, ZYXI and VQSLF data is in U.S. dollars. MCLDF, FLYHT, and OSSIF data is in Canadian dollars | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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