Total Telcom – a micro-cap opportunity

Rom communication screenshot.PNG

You are probably looking at the above picture, wondering if I’ve gotten confused and started writing about the wrong company. Well, sometimes opportunities aren’t clearly marked like stop signs at an intersection. Total Telcom (TTZ – TSX Venture) is one of those opportunities. The company itself is so small, and so “underpromoted” that I actually couldn’t find a reasonably sized company logo on the web, so I went with the logo of their operating subsidiary. So, if a picture is worth a 1,000 words, this one says one thing – they are worried about getting stuff done and making money, not how shiny their website looks.

Full disclosure – I am long on Total shares: Before discussing the company itself, I believe it’s only fair that you should know that I hold shares of Total. The cynics among you have now made the observation that “this guy is just promoting this thing so he can sell to the sheep”. Without a doubt, this is an endemic problem in the small cap market. However, if we look at a 3 year chart of TTZ, you can see that if I do indeed hold TTZ, I may have bought at prices well below todays price – or well above. The short answer is that while I am indeed long on TTZ, I think there’s more value to be had than the current price today, which is bouncing around $0.15 as you read this.

TTZ 3yr chart at Oct 29 2018.PNG

What does Total Telcom do ? Traditionally, Total specialized in  (and continues to specialize in) two way communication in very harsh & remote environments. We are all very familiar with instantaneous communication in this era, but in some places (the middle of the Atlantic ocean, the Mojave desert – you get my drift), this isn’t the case. If I break my ankle while falling down the stairs in my home, I can reach into my pocket and dial 911, and fairly soon someone will come and get me. On the other hand, if I am on top of some remote mountain and the same happens, things can get ugly quickly. This is where Total comes in.

For those of you that are already back country types, you are probably saying that there are already products and competitors in this market place, and you are right. One name that springs to mind immediately is Garmin. However, Total, has been aware of this for a while, and with this in mind has sought out very specialized niches where it can excel. In 2015, Total started providing communication equipment & services to the Baja racing circuit, and is now entrenched as the provider of communications for those races. Additionally, Total has recently found it’s way into a brand new business line – wireless heater controllers, which are used to remotely control secondary heaters for industrial equipment such as heavy haul trucks. The combination of growth in both of these segments and a pristine balance sheet creates a compelling story – the details of which I’ll now launch into. For those of you that are new here, I use a green, redor amber format to indicate whether a particular factor is good, bad, or neutral. Here we go….

The chart isn’t necessarily screaming “buy me”:  Looking at the 3  year chart (above), you can clearly see that Total has come off a significant high. Normally, I look for what I call a “saucer bottom” which suggests to me that interest is low. In this case, the situation isn’t as clear cut as I might like it to be. However, I believe the fundamental factors that I’ll discuss will provide more impetus for the share price to at least stay flat or move higher, rather than crater catastrophically. In the meantime, I’ll suggest that while the chart isn’t a falling knife, it provides an “ok” signal at best.

No debt & lots of cash.  Not much explanation needed here. Total has about $0.06 per share in cash, no debt to speak of other than normal payables, and is worth about $0.085 per share on a book value basis. While Total would not be considered “deep value”, the balance sheet is pristine and presents no risk of insolvency.

Total yr end 2018 bal sheet

Cash flow positive. Normally, with many of the companies I research, they are either coming out of a prolonged downturn (Titan Logix) or management has stumbled (Pioneering Technologies), which means they are usually burning cash. Not the case here – Total has been cash flow positive for the last 2 years, regardless of whether one looks at cash flow before or after working capital changes. Not only is cash flow positive, it has grown by 44% (cash flow before changes in working capital) or 61% (cash flow after working capital changes), depending on which cash flow metric you prefer.

Total yr end 2018 cashf flow.PNG


Clean earnings. Unlike some companies I have written about, the income statement for Total is dead simple, and does not suggest that anything is particularly funky. The only items of particular interest are the sudden drop in R&D expense, which is explained in the notes to the financial statement, and the anemic revenue growth, which I address later.Total yr end 2018 inc st

In previous years, the R&D expense did not meet the guidelines for capitalization, whereas for 2018  it did. The net effect is a drop in R&D expense and capitalized product development costs appearing on the balance sheet. Some of you may make the astute observation that if one were not to capitalize the R&D costs, it would have been included as an expense, and therefore would have severely impacted earnings. While this is correct, I tend to keep a closer eye on cash flow, which is more representative of business health, as opposed to earnings, which are subject to the occasional “massaging of numbers”. As indicated earlier, despite the cash payment for $312,000 of R&D costs, Total still exited the year with more cash than it started with, despite almost no revenue growth – which brings me to my next point.

Flat revenuesNormally I don’t specifically address revenues, unless I believe there is something of particular interest worth mentioning. In this case, there is, and the way one views it is highly dependent on whether or not you are a “glass half full” kind of person or a “glass half empty” kind of person. Hence the peculiar coloring of this section – half amber, half green.

Revenues grew by a measly 2.2%, which doesn’t exactly create excitement. With that in mind, I took a closer look at the notes to the financials, and came up with a few interesting tidbits. First, the bad news: 

TTZ full yr MDA rev decline

This is analogous to a distance runner beating his prior years time in the Boston Marathon, despite the fact that he or she was hungover and was wearing flip flops. Perhaps it’s not that extreme, but the fact remains that Total exceeded prior years sales and cash flow numbers and kept costs in line, while one major customer basically “went away” and another emerging sector was met with supply constraints beyond their control. So, despite the fact that they were not firing on all cylinders, Total still managed to do better than last year. Now the good news:

TTZ full yr MDA breakeven

The fact that the company is entirely self funding based on recurring revenues means that any incremental revenues from hardware sales (or further growth in existing sectors) filters right down to the bottom line, which is music to a shareholders ears.

So, even though revenue growth is flat, it is still a story that has good news buried in it. I will leave it up to you as to whether this is a good news story, or just a neutral story at best.

High Insider ownership. Three insiders own approximately 29% of the total shares outstanding, as follows:

  • Neil Magrath, CEO:                                  3,045,606 shares, or about 12.2 % 
  • Scott Allen, CFO:                                       1,986,475 shares, or about  7.95%
  • David Hammermeister, Director:         2,259,133 shares, or about 9.05%

Other insiders also have ownership stakes, but these three are the largest, and the fact that the CEO and CFO both own such significant amounts indicates that management is clearly aligned with outside shareholders, so the insider story is clearly a “green light”.

No analyst coverage or institutional ownershipGiven that Total generates enough cash to fund operations, and the fact that management is incredibly quiet, the company is virtually unknown by both investment bankers and the general public, as it hasn’t needed to raise capital. In the interim, this means that the shares shouldn’t be pushed to ridiculous heights anytime soon, nor should there be a mass selloff (see:RHT) if things go sideways. Assuming that Total continues to generate profits, the market will eventually re-price the company given their cash flow generation ability and the cash heavy balance sheet.

No self promotion. Total has issued precious few press releases over the years, and the bulk of them relate to standard news items, such as quarterly earnings. If anything, they could be accused of not promoting the company enough. In any case, lack of self promotion means that the share price hasn’t been artificially propped up by the overly optimistic words of management.

No share buyback – but total shares have been static. If a company is buying back shares, this section would typically get a “green light”, and if a company has seen total shares expand slowly over time, then I might suggest that an “amber light” is more appropriate. In this case, the fact that shares outstanding have increased by only 1% over the last decade suggests to me that Total is keeping a tight lid on things, so this section is green.

Easily understood business. I have to admit that while I could easily understand the value proposition for their two-way communication segment, I was at first a bit unclear about the wireless heater controller segment – I wasn’t quite sure why anyone would want a wireless heater controller, which prompted me to ask some questions.

For those of you that are also wondering exactly why one might want a wireless heater controller, the explanation is pretty simple, and should have been intuitive for me. I live in a part of Canada that gets fairly cold in the winter, so many people end up running their vehicles in order to warm them up before they get on the road. Because they are running the engine, this creates extra emissions, wastes gas, and poses a theft risk. A small secondary heater, equipped with a wireless controller, allows people to warm up a vehicle remotely (whether it’s a semi tractor or a pick up truck) without running the engine,  such that the interior of the vehicle is warm, the windshield is free of frost, the engine oil is warm, emissions are significantly reduced, and money is saved because the engine isn’t burning gas or diesel. Once I heard this, the value proposition became clear. I have gone outside (more than once) in -35 degree weather simply to start a car and scrape the windshield – and it sucks.

Potentially disruptive technologyBoth of the business lines occupy very specific niches, but I’m not sure these are “disruptive technologies”. The products offer significant improvements, but I can’t say that they impact the existing status quo the same way streaming video eventually killed Blockbuster.

Current valuation is attractive.  All of the above factors paint a good picture. However, valuation is usually where the rubber hits the road. At any time of the day, you can go to the market and buy Facebook, Google, and Amazon – all of them very good companies, but also very expensive. While I’m not here to argue the merits of the various FANG stocks, the point is that it’s easy to buy something “good”, it’s not always easy to pay a price that doesn’t break your wallet.

Currently, the price of Total is trending somewhere around $0.14 – $0.17, with recent price action likely falling at the lower end. In order to discuss valuation, we will use an average price of $0.155, and based on the most recent financials, this suggests various valuation metrics:

  • Book value: At a book value of $0.085, this suggests we are trading at 1.8x book value. Not cheap, but not extravagant either.
  • PE multiple: With EPS coming in at $0.019, this suggests a multiple of 8.15x, which I would argue is attractive.
  • EV/EBITDA multiple: Because Total has lots of cash and no debt, their EV/EBITDA multiple is a very attractive 5.1x, given an Enterprise value of $2.36 MM and EBITDA of ~ $461,000.
  • Cash flow yield: Assuming that we use the lower of the two  cash flow values ($592,313, or $0.024/share), this gives us a very respectable cash flow yield of 15.5%.

With the exception of book value, all of these multiples suggest that the current valuation of Total is reasonable, and even better, that reverting to a more average multiple could provide a bump in price.

With that in mind, we took a look at the price of Total during the period from May 29 2018, when 9 month financial were released, to October 24 2018, the day before full year financials were released. We use this period because it (a) provides us with 9 months of financial data, which is the next best thing to a full year, and (b) it eliminates the higher prices of Q1 which would skew the ratios upwards. During this period, Total traded between $0.12 and $0.215. If we apply the average multiples during this period for Book value, PE, EV/EBITDA, and Cash flow yield we get the following:

  • Book value: Applying the average multiple of 2.08x to book value of $0.085 gives us a price of $0.175, a 13% gain over our hypothetical price of $0.155.
  • PE multiple: Applying the average multiple of 12.96x to earnings of  $0.019 gives us a price of $0.245, a gain of 58%.
  • EV/EBITDA multiple: Applying the average EV/EBITDA multiple of 7.83x to EBITDA gives us a price of $0.205, a gain of 32%.
  • Cash flow yield: Applying the average cash flow yield of 11.12% to cash flow of $0.024/share gives us a price of $0.215, a gain of 39%.

So, for those of you that are “short term traders” , there is a potential opportunity as Total reverts back to a more normalized valuation. For others, you might have a longer hold period in mind, which is where I believe the real opportunity is.

The current price isn’t suggesting any growth. Back in Q4 of 2017 and Q1 of 2018, the share price of Total was well beyond where it is today, precisely because of this reason – because too much growth was built into the share price. As such, the share price traded as high as $0.55, only to come back down to earth.

This is not to say that that, in the future, the price could trade beyond these levels. However, at that time, someone decided to “pay early” for significant revenue and earnings growth that has yet to occur. By comparison, todays share price suggests little or no growth. With that in mind, what sort of real revenue growth would be needed to move the share price ? This is where I believe things get interesting.

One of the nice things about a company like Total is their remarkable consistency, which makes it easier to model future outcomes. Consider the following:

  • Revenue growth: From 2015 to 2018, they have managed to double revenue from ~ $800,000 to $1.78 MM today. We forecast various levels of growth from 5% to 35%.
  • Cost of goods: Since 2015, it has remained virtually static, ranging between 40% – 43%. We use an average of 42% for our forecast.
  • G&A: Despite the fact that revenues have doubled, G&A has only grown by about 8% over 2015 levels. We have increased G&A costs by 2.5% for our forecast.
  • R&D:  Because of the capitalization of R&D costs in 2018, this item has seen the most variability. We have used the average of R&D costs from 2015-2018.
  • Amortization: Although it has virtually no effect on the forecasted outcome, we have used the average amortization cost from 2015-2018.
  • Finance income / FX gains (losses): We exclude these, as we are trying to isolate growth in earnings from the core operations.
  • Taxes: Because Total has significant tax pools, earnings are tax exempt.

Using these parameters to forecast what the next fiscal year might look like gives us the following outcomes:

TTZ 2019 growth forecast

The key point to takeaway from all of this is that a significantly higher share price isn’t that difficult to achieve. Currently, the valuation of Total is arguably at the lower end of the spectrum, as it trades at ~ 8.5x earnings. Even with nominal growth in revenues and a more “normalized” earnings multiple, returns on todays share price can exceed 50% or more.  If one is more bullish, and assumes that Total can grow revenues a bit faster, one can see returns well in excess of 100%. On the other hand, if earnings stay flat, then the downside is likely limited to the low teens, given that the company has a hard book value of $0.085, and insolvency (barring an unforeseen disaster) is out of the question.

As I indicated previously, I am already long on Total shares, and have been a recent buyer at these levels.  I believe the risk / reward tradeoff is compelling, and that total returns over the long term could exceed 15%-20% annually. Of course, these are only my thoughts & opinions – if you have questions or comments, I can always be reached at 









Reliq Health, Part 1: Bad vital signs…

RHT image

On October 16th, 2018, Reliq Health Technologies (RHT – TSX Venture) issued a press release indicating that the company would be “restating financials due to revenue collection issues.” Anyone that was long on Reliq immediately got the cold sweats, as the shares tanked on massive volume. As they say, a picture is worth a thousand words, and a 5 day chart as of 11:00 EST on the 16th serves up a lot of words, most of them nasty:


RHT chart

Those of you reading this that are (or were) long on Reliq have either sold, are contemplating selling, or are perhaps even doubling down, as the company still has cash in the bank. That being said, the question that all of you are likely asking is how could I have avoided this train wreck ? In Part 1 of this series I want to discuss how I avoided it in late 2017, and in Part 2, how you (or other investors) could have done the same throughout 2018. Similar to prior posts, I use green, amber and red headings to simply indicate those issues that are good, neutral, or bad.

My involvement with Reliq: Before delving into the nitty-gritty, I always like to provide the background as to how (or why) a particular company was brought to my attention. In this case, the story is actually not that interesting. I participated in the private placement that preceded Reliq, and held “dead money” for a number of years. Occasionally I will participate in private placements, knowing full well that there is the possibility of losing 100%. In this case, I held various illiquid companies until one of them (Moseda Technologies) changed its name to what we now know as Reliq Health Technologies.

What does Reliq Health Technologies do ? As per their website, Reliq states that they “specialize in developing innovative software as a service solutions for the $30 Billion community care market. Reliq’s IUGO care technology platform is a comprehensive SaaS solution that allows complex chronic disease patients to receive high quality care in the home or other community based setting, improving health outcomes, enhancing quality of life for patients & families and reducing the cost of care delivery”. 

In plain English, I would translate this to mean that Reliq is introducing technology into the health care market to achieve the same or better outcomes while at the same time reducing costs. On the surface, this is an easy investment concept to grasp, and there is a clear value proposition. Clearly, the idea sounds like “a better mousetrap”.

I had been ignoring Reliq. But then, their chart got my attention: As I had indicated previously, my ownership in Reliq was simply a function of having participated in a private placement. Knowing that this wasn’t going anywhere for a while, I didn’t pay a lot of attention, until I noticed some life in the chart:

RHT tech chart

Having been “skipping along the bottom” for some time, Reliq started picking up in Q2-Q3 of 2017, and from a technical perspective, it didn’t look it was going to stop. So at this point, I started looking a bit deeper.

No cash on hand & lots of cash burn. At the time the chart was looking interesting, the most recent financials were those for the nine (9) months ended at March 2017. A quick look was all that was necessary – the balance sheet told me that Reliq had little money in the bank, and that it was theoretically insolvent.

RHT Mar 31 2017 balance sheet


However, a company can still get by if it’s not burning through it’s cash. A look at the cash flow statement killed that thought: Reliq had been burning through cash and raising capital via share issuance for some time already.

RHT Mar 31 2017 cash flow


Based on this information, it was clear to me that this wasn’t a fundamental story, at least not right now. Given that the fundamental story wasn’t compelling in any way, I resolved to take a look at the holdings of insiders.

Significant insider holdings:  A quick look at SEDI indicated that insiders did indeed own a significant amount of shares, approximately 11 MM of the 58 MM outstanding, or roughly 19%. So while the company clearly needed a capital infusion, insiders were at least going to feel the pain along with other shareholders.

Lots of coverage by analystsGiven that Reliq had raised capital by the time I was looking at them (Q2-Q3 of 2017), and clearly would need more, it was already a foregone conclusion that this story had been pitched to various investment firms looking for some work. What I did not know at this time was that as the Reliq share price picked up steam, one would eventually be able to find a total of 10 distinct interviews on BNN where Reliq was discussed, usually in bullish tones. For those of you that have some time, and enjoy the free entertainment, I’ve included the BNN link below.

BNN coverage of RHT

Lots of self promotion: As if Reliq didn’t have enough eyeballs on it already, it wasn’t shy when it came to issuing press releases. From August 1st 2017 through to December 31st 2017, Reliq issued ~ 20 press releases, more than enough to incent investor interest. For instance, the screenshot below shows a total of 9 press releases in a span of a little over 1 month. Arguably, 2 of the releases are IIROC related, and therefore are beyond the control of Reliq. Regardless, all of these press releases, in conjunction with analyst coverage, acted like a giant magnet – attracting investor eyeballs, and with them, more money to chase the Reliq story.

RHT press

No share buyback & rapidly increasing share count: This is fairly self explanatory. With no excess cash available to buy back shares, and a desperate need for cash to begin with, Reliq was ripe for dilution. At the time I was looking at them, total shares outstanding were ~ 58.4 MM, up from 49.4 MM the year before.

Easily understood business: As I indicated previously, the concept that Reliq was pitching was easy enough to understand – the use of technology to make the delivery of health care more accessible, more efficient, and less costly. While I didn’t have the ability to describe the details of how the technology was deployed, I could grasp the concept.

Potentially disruptive technology: Again, it was fairly clear that Reliq could significantly change the health care marketplace – if they could execute. Their ability to execute their plan was key, as without it, the story was simply one of hope. With that in mind, I decided to determine a “back of the envelope” valuation.  Specifically, what sort of sales growth would they have to achieve in order for the current valuation to make sense ?

Valuation – off the charts: Valuing an early stage company is always difficult. However, even if one can’t land on what the exact value might be (or should be), one can still try and understand the implied value of the firm, to see if it make any sense at all. This is what I determined to do with Reliq. 

Some time had passed since I had first started to look into Reliq, and at this point it was November of 2017, which meant I now had year end financials (year ending June 2017)  to work with. Since I had no way to forecast what actual revenue and expense numbers might be, I made a number of assumptions for what I considered to be a “best case scenario”, as follows:

  • Revenue: I had no idea what revenue might look like, so I projected various scenarios ranging from $1.0 MM to $15.0 MM.
  • COGS and Gross Margin: I decided to use the 2016 COGS% (58%) instead of the 2017 COGS% (80%), as using the 2017 COGS% would have required an astronomical jump in revenue.

RHT cogs

  • No growth in other expense items: I took total expenses for 2017 ($2,836127) and backed out amortization ($2,047), share based expenses ($243,305), and finance charges ($14,480) to arrive at an adjusted value of $2,576,295. I made the very optimistic assumption that Reliq could maintain expenses at this level, and used this value to calculate a go forward EBITDA value.
  • Total shares outstanding: I used the shares outstanding as of June 30 2017 (approximately 76 million shares) to calculate market cap and enterprise value.
  • Share price: I used the average price of the shares from November 01 to November 15 2017 (~ $0.65), as it was during this period that I was considering selling. The actual prices during this time ranged from $0.475 to $0.87.

Once I had all this information in hand, I had a handle on whether or not the valuation of RHT made any sense or not:

RHT ev to ebitda Oct 2017.PNG

To be painfully clear, Reliq had to increase revenue from $183,652 in fiscal 2017 to at least $9.0 MM, maintain gross margins of 42%, and have zero increase in all other expenses in order for the value of the company (at $0.65) to make any sense. Anything less than perfection meant that the company was likely too hyped, and the valuation made no sense. With this in mind, and given that I was well into the money at this price, I sold between $0.76 and $0.82 and redeployed the capital into other opportunities. 

However, as you well know, the Reliq story doesn’t end there. Having washed my hands of Reliq and redeployed the capital, I watched the share price climb as the market made a fool out of me (as it sometimes does). I was curious as to how high the price would go, and would occasionally take a look at the financials to see if the dizzying heights of the Reliq share price were somehow fundamentally driven. Given what I could see, I believed this was not the case, and I believe the information was there for investors to see the same. This is what I’ll discuss in Part 2, as I believe that many investors could have avoided the Reliq debacle, and the associated loss of capital.

As always, these are only my thoughts and opinions. Let me know if you found this post informative, or if you just have questions or comments.  I can be reached at: