Titan Logix – update at fiscal year end 2020

Titan released full year financials on November 26th, 2020, and as expected, the market reacted with a big fat yawn. While the shares are up slightly ($0.365 as of December 10, 2020), they are still inexpensive, given that the company is sitting on $0.33/share in cash, has no debt, and has skated through the pandemic with only marginal balance sheet impacts. Titan is currently still in a “holding pattern”, as it is not benefitting from the “Vaccine trade” that is pushing Canadian energy companies to recent highs. So, without further ado, we delve into the good, the immaterial, and the ugly parts of Titan Logix.

The chart is improving. As mentioned, the shares are up a bit, and this is reflected in the chart. That being said, the energy sector is still decidedly “unsexy”, so we would not be surprised if the current share price strength waned somewhat. In the very short term, the bottom line is that some of the easy money has come off the table, but it would not a total surprise to see the shares fall back down to $0.32 – $0.34. If the market is a beauty contest, Titan is still perceived as ugly, albeit with a bit more lipstick as of today. Bear in mind that we have been long on Titan since late 2018, so for those that are out of the money – we feel your pain.

The balance sheet is virtually unchanged. There is really not much to say here, as the balance sheet is only slightly changed from Q3. Once the dust settles, there is a $110,000 deterioration in net equity from Q3, which translates into a loss (in book value) of approximately $0.001 – not really something that’s going to move the needle. In short the balance sheet is the same – lots of cash, no debt.

The income statement is worse than last year – as expected. Not surprisingly, revenues are down (-26%), COGS are down (also -26%), and the company declared a net loss of $578K vs a small net income of $50K last year. To be fair, Titan was the recipient of a total of $440K of Government wage subsidies, which cushioned the impacts of the COVID slowdown, but virtually every organization that was paying attention managed to participate in such programs. While it’s true that if one adjusts for this amount, then the net loss (and the balance sheet) would be worse, but exclusion of this amount would not be a game changer. All things considered, the income statement story isn’t that bad. Gross margin held steady at 53% on a YoY basis, G&A is actually down 4% even after adjusting for the impact of the $440K wage subsidy, and the only noteworthy increase is a 62% ( + $410K) increase in Engineering expense. In the MD&A, this increase is addressed, as the MD&A states:

“….during the fiscal year, the Company incurred engineering expenses of $1,067,211 compared to $658,711 in fiscal 2019. The Company developed software and cloud based applications for its first IIoT products, the Titan Data System (TDS) and the Titan API plug-in for its guided wave radar gauges. The increase in engineering expenses was offset with wage rollbacks, discretionary expense reductions combined with benefits received from the CEWS program...”

In a sea of bad news, statements like this are a solid indication that the company is not sitting back and hoping – they are actively making the effort to come out of this very dark period with a better product offering. So, in closing, while the income statement is ugly, it could be a lot worse.

Cash flow from operations is negative – as expected. Not unlike the income statement, cash flow isn’t great. However, in light of the fact that revenues YoY were down by almost $1.5 MM, what can we expect ? The way that one views the cash flow statement is a matter of context. Yes, in absolute terms it’s bad, as cash flow from operations are negative, and would be negative to the tune of -$1.11 MM if one adjusts for the $440K of Government assistance. If this were representative of cash flow in a normal year, this would look very bad – but in the context of one of the worst years ever, it’s expected. It would be very surprising if Titan revenues continued at the same muted level in fiscal 2021, so while this cash flow statement isn’t “good”, it shares the same thread as the income statement – not good, but not surprising, and very likely to get better.

Insider ownership continues to increase. Since the Sep. 30th update on Titan, the largest shareholder, the “Article 6 Marital Trust created under the First Amended and Restated Jerry Zucker Revocable Trust dated 4-2-07” has continued to increase their position, purchasing an incremental 119,500 shares at an average price of $0.33. This means that the Trust now owns a total of 10.5 MM shares, or about 37% of the total shares outstanding. The consistent purchase of shares may suggest that the Trust has an interest in taking the company private, but this is conjecture at this point. Whatever the case, the Trust sees value in the company, as they would not continue to purchase in the open market if they felt the upside wasn’t significant.

The news cycle continues to be dormant. This is not a company that is shouting from the roof tops – they are simply trying to execute as best they can. Given that Titan is associated with the energy sector (for better or for worse), and the fact that they utilize media on a bare bones basis, the shares are not enjoying any sort of “hot news” premium. In fact, for those wishing to acquire shares, tax loss selling season may prove to be lucrative, as some investors who have short time frames may start selling as the end of the year draws near.

We continue to hold Titan, and continue to buy at the low end of the price range. The Titan story hasn’t changed much since the last update, and realistically, expectations were low. In closing, we would reiterate the following points:

• The chart is definitely looking better: While there hasn’t been a sustained upward move, this is still a good place to accumulate cheap shares. Aside from tax loss selling, it would seem unlikely that the shares get much lower.
• Tax loss selling will provide patient investors with opportunity: For those that would like to get in “really cheap”, it probably makes a lot of sense to put in some laddered stink bids. There are always some sellers out there who have either lost patience or aren’t sure why they bought in to begin with.
• Titans balance sheet is very solid – many competitors may not be: An oft repeated theme on these pages is “there is no bankruptcy risk”, but the other side of that statement means that competitors who are poorly capitalized are dying a slow death, and new entrants are certainly thinking twice before competing in this decidedly “unsexy” space.
• When activity picks up, Titan will be one of the few left: Commodity sectors (and those industries related to commodities) tend to endure long hot & cold spells, but when they do turn around, it can get busy – very busy.
• The fact that Titan is diversifying their revenue stream is not priced in: At this time, the market is pricing Titan as a “pure energy services” firm. While it remains to be seen as to whether or not they can truly diversify their business model, it’s clear that this possibility is not priced into the company today.
• This is a value play – patience is required: If your investing time horizon is short, then maybe this isn’t the right place to be. While a quick bounce in price could happen, a longer recovery is more likely.
• The low hanging fruit is around $0.55: If nothing else, it would seem quite likely that the shares at least trade at the 2016-2019 average of the price/book ratio (1.07x), which would imply a price of $0.55, or upside of 50% from current prices.

I am long on Titan, with an average purchase price of ~ $0.45 CAD, and will continue to purchase at the current levels.

As always, these are only my thoughts & opinions. If you have questions or comments, I can always be reached at mark@grey-swan.com.