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Edward Vranic, CFA
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I am a private investor based out of Toronto, Canada. I have been investing since 2003, first with a focus on mining and resource stocks but more recently I have focused on tech stocks and deep value stocks, usually trading in small caps listed on the TSX exchange in Canada. Since 2006 I have... More
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  • Will Facebook Target This Leading Edge Virtual Reality Technology Company Next?

    Over the summer, Facebook, Inc. (NASDAQ:FB) purchased virtual reality developer Oculus VR for $2 billion in cash and stock as the company wants to not only corner the virtual reality gaming market but revolutionize the way people interact in everything from business meetings to university lectures. The Oculus Rift is the name of the headset that allows individuals to step inside the virtual world. Up until now the Developer Kits have been available to a select group but there are plans to release a consumer version available for everyone in April 2015.

    The Oculus Rift is designed to be as comfortable to wear and lightweight as possible and provides ultra-low latency 360 degree head tracking so you can seamlessly look around in your virtual world.

    What makes this world possible is the Spectra7 VR7100 chip made by Spectra7 Microsystems Inc. (OTC:SPVNF), a high performance analog semiconductor company whose ultra-thin, fast and light chips are imperative for the consumer products of the near-future which includes virtual reality, wearable computer technology and Ultra-HD 4K televisions. Spectra7 has little trading volume on its OTC symbol, but it is much more liquid under the symbol SEV on the Toronto Stock Exchange. Source: https://www.ifixit.com/Teardown/Oculus+Rift+Development+Kit+2+Teardown/27613

    The picture above comes courtesy of IFIXIT during its Oculus Rift Development Kit 2 Teardown. Quoting the review:

    The Spectra7 VR7100 was the driving force behind the vastly improved size and shape of the DK2 compared to the DK1 along with much thinner cables. While the DK2 is a better product, virtual reality headsets are still in their infancy stage.

    SPVNF will again be the driving force in the next generation of VR wear for the consumer release as last week the company announced the development of the VR7050, the industry's first chip for virtual reality gesture recognition and motion sensing backhaul. The success of virtual reality gaming systems depends on the ability to replace the tethered game controller with complete gesture recognition. Quoting Tony Stelliga, CEO of Spectra7:

    "New interconnects based on Spectra7's VR7050 will now be able to provide seamless transport of gestures and motion data via HMD mounted miniature cameras or sensors, greatly simplifying and enhancing the consumer VR experience."

    Continuing with the news release:

    "With growing mainstream consumer interest driving VR to become a "Must-Have" Accessory for Gamers, over a dozen major consumer OEMs are entering the VR market to capitalize on the installed base of over 250 million VR-capable game consoles. Samples of the VR7050 will be available in the market in Q4' 2014 with volume shipments expected to commence in 2015."

    With Spectra7's chip being so imperative to Oculus' ability to develop a truly intuitive and user-friendly virtual reality experience, one must wonder what will be the future relationship between Oculus and Spectra7. As in previous models, it is highly likely that Oculus will use the Spectra7 chip for its consumer release. On Tuesday, Spectra7 announced a 500,000 volume order of devices which include the VR7050 and VR7100 ordered by "an industry-leading consumer original equipment manufacturer". Although not specified, my guess is that this order was from Oculus.

    What Ambarella, Inc. (NASDAQ:AMBA) has done for GoPro, Inc. (NASDAQ:GPRO) regarding the video-capturing and image processing quality for its cameras, Spectra7 can do for Oculus for the quality and processing ability of its VR devices. Just like how AMBA and GPRO have had a tremendous 2014 in terms of share price appreciation thanks to excitement over the Hero 4 camera, can Oculus and Spectra7 expect the same for 2015 over the consumer release of the Oculus Rift?

    Since Facebook closed on the Oculus deal, Oculus itself has been on a buying spree. It purchased RakNet, a leading middleware game-network technology provider. While it is securing ownership of the software needed to provide popular content for VR, securing the hardware needed for market-leading VR technology is just as important to ensure it remains a step ahead of the competition in the burgeoning virtual reality gaming market. For virtual reality to step into non-leisure activities like medical practice or business meetings like Facebook's management envisions, the chips made by Sprectra7 which can process the amount of data needed to make that reality work in the minute detail required are a must.

    Whether or not Spectra7 becomes part of Facebook's empire or merely remains a valued supplier, I believe SPVNF's stock is a great investment for anyone looking for a microcap technology play with high appreciation potential. The market cap sits at around $50 million and while I am very bullish on the prospects of its virtual reality solutions, Spectra7 also has a foothold in the wearable technology and wireless solutions markets.

    Reviewing Spectra7's Q2 financial results and Management Discussion & Analysis reveals current revenue streams, strong margins and promise of growth. While revenue remained relatively flat for Q2, that was a symptom of declining wireless revenues as the company continues to focus on its efforts on its interconnect revenue - the semi-conductor, HD display and wearable technology businesses. Note that while wireless revenues are dropping, the gross margin is nearing 100% as the source of the wireless revenues is largely from the royalties earned on its wireless IP licensing. The interconnect revenue has more than doubled for the first six months of 2014 while gross margins remain over 70%. The move away from the lower margin wireless business improved the overall gross margins of the company to 76%.

    (click to enlarge)Source: Spectra7

    While the company is still in its start-up phase and is burning about $2 to $3 million in cash per quarter after accounting for operating expenses and R&D, it is well-funded with $8 million in equity financing in April and $4.75 million in debt financing announced two days after announcing that the VR7050 will be ready for sale in early 2015. It looks like the recent round of debt financing will be used for the working capital requirements needed for the mass development and sale of the VR7050 with the 500,000 order being the first step. Any further working capital requirements should be met with the 30 million in-the-money warrants that are due throughout 2015 that will bring $13 million should they all be exercised. I expect Spectra7 to continue its revenue growth well beyond the doubling we have seen in 2014 and should be an income generating entity in late 2015 to early 2016.

    Global Maxfin Capital has a $1 price target for Spectra7, however that was before the release of the VR7050, the 500,000 order and the debt financing so the target should be increased based on these recent positive events. The chart below shows the analyst expectations on revenue and EBITDA through 2018.

    With the 500,000 order in the mix, revenue expectations of $17 million for 2015 will increase substantially. No revenue figures were given in the news release but broadly speaking if the chip ranges from $10 to $50 each, this one sales order could bring in anywhere between $5 million to $25 million. An updated analyst report from Global Maxfin could end up resulting in twice the amount of revenue expected for 2015 and a positive EPS.

    The 500,000 order so quickly after the release of the VR7050 chip shows that at least one manufacturer wants to put Spectra7's latest technology into its hardware as soon as possible to remain one step ahead of its competition. If that company is Oculus, this relationship may be laying the groundwork for Facebook's next purchase. If that company is not Oculus, that means it has some healthy competition and if Sprectra7's VR7050 and VR7100 are being ordered by other HMD makers, it may be cornering the market where millions of virtual reality devices are projected to be manufactured and sold annually. Either outcome will lead to a very positive result for Sprectra7 shareholders.

    Disclosure: The author is long SPVNF. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

    Tags: FB, SPVNF, long-ideas
    Oct 16 11:19 AM | Link | Comment!
  • Update On Stans Energy

    Since my article on Stans, I have had dialogue David Vinokurov, Vice President of Corporate Development, to clarify some issues. There was some question as to how they $118M settlement was reached and if the mining licenses are still valid. I have provided a screen capture of this email conversation for those who wish to read it.

    I can also confirm through this email trail that Stans is starting the collection process through its lawyers and that it has multiple targets in sight, including the Centerra shares. I am quite confident in the company's ability to eventually collect on this settlement, though it is too early to speculate on definite timing.

    Disclosure: The author is long HREEF.

    Tags: HREEF
    Aug 26 12:47 AM | Link | 1 Comment
  • Partner Jet's Outstanding Earnings Growth Points To 1000% Gain Potential

    Partner Jet (PJT.V) released financial results on July 24 for Q2 ended May 31. I have written about Partner Jet before, and these results further my long-term bullishness on the company. Keep in mind when reading these results that upon market close on July 24th the stock price was 11.5 cents and the market cap was just over $1M. Here's a chart from the company's MD&A that shows the last 8 quarters of performance:

    (click to enlarge)

    Needless to say, these were excellent results. The 2 cent EPS for Q2 2014 represents a 196% increase to net income compared to Q1 2014 and a continuation of the trend of outstanding revenue and earnings growth for the past three quarters. Revenues for Q2 2014 of $3.7M more than doubled when compared to the Q2 2013 result of $1.7M and were more than 50% higher than Q1 2014's result of $2.4M which at that time was a record for the company.

    For the last three quarters the growth in the company has been phenomenal. The key questions going forward is how did the company grow so much all of a sudden in the first place and if the company can maintain this aggressive growth rate?

    We can begin to answer those questions by looking at what has changed for the company over the last little while. What stands out is the acquisition of an aircraft called the Citation X in April 2013. This aircraft claims the title of being the fastest business jet around. Clues from the MD&A seem to point to that conclusion as well as the explanation of "... more aircraft activities due to the increase in number of corporate aircraft managed" appears to be a prevailing theme.

    Note that with the increased revenue comes better gross margin with not only the aircraft management sector of the company's business, but with all three sectors. A clue that suggests Q2's revenues are sustainable and are not just a fluke can be seen in the company's charter activities.

    Regarding the sustainability of these revenues, I point to the first paragraph stating that the "charter rates remain unchanged...fixed by the long-term contracts with the aircraft owners". This suggests that Partner Jet has a set of long-term contracts that will ensure a solid base of revenue going forward. These customers must be very happy with PJT's services as evidenced by the increased flight volumes. It looks like PJT has found a niche to service clients effectively, because business travel as an industry has not been on a growth path given cuts to corporate spending and increase in teleconferencing. My guess would be due to the new aircraft, PJT is able to offer some of the fastest and cheapest travel services around. Since the company is so small, it isn't making a big dent into the services of larger commercial carriers and other chartered flights services so it may be able to grow like this for quite a while before competitors react.

    The final division is aircraft maintenance. As seen by the numbers below, it is the youngest and fastest growing division and the only one with negative gross margin. That margin appears to be quickly heading towards positive territory for future quarters.

    While the revenue growth has been extremely impressive, the company's ability to control costs during this growth period is truly unique. Even with record setting revenue growth, general operating costs were flat for the quarter when compared to Q2 2013. As the company has grown, it hasn't lost focus on efficiency gains from cost control measures.

    Reading through the MD&A, Partner Jet takes advantage of the relationship its CEO has with ownership of other companies at a centralized location. Refer to this note:

    "Partner Jet Corp. and its subsidiaries are located at one centralized location at 2450 Derry Road East, Hangar #9, Mississauga, Ontario. These recently renovated facilities house sales, dispatch, maintenance, administration and accounting, all under one roof allowing synergies for the Company to move forward. The hangar is large enough for the continued expansion of the Company's management and maintenance operations. The hangar also has 24 hour surveillance and is completely controlled by the Company."

    As well as the related party transactions:

    What does this mean for PJT going forward? Reviewing once again the last four quarters of financial performance, the following numbers can be gathered.

    The important thing to gather from this growth rate is that revenues are very likely to be growing each month. Meaning that while revenues for each of the last three months average out to $1.2M, the exit month of May probably had a much higher figure, as illustrated by my estimate below.

    (click to enlarge)

    If the company achieved $1.5M in revenue for May, that means the June starting point would also be $1.5M and likely to grow from there. With this growth trajectory, revenues should be $4.5M or greater for Q3 ended August. Based on the increase in net margin and controlled operating costs, a margin percentage of 6.5% seems achievable. On $4.5M in revenue that would lead to net income of $292,500, an EPS of 3.2 cents.

    Assuming no growth or margin improvement thereafter (a very conservative assumption), the 3.2 cent quarterly EPS would translate to a 13 cent annual EPS. A conservative 10 P/E ratio leads to a stock price of $1.30, or more than 1000% above the 11.5 cent close.

    One could argue that PJT.V is deserving of a much higher P/E ratio than 10 given the growth rate and that the 13 cent EPS target is too conservative. I can easily see this stock trading between $2 and $5 at this time next year if the market finally recognizes and rewards the company for such great financial performance.

    The issue with PJT.V is that it is an extremely thinly traded stock. I have been much of the purchase volume over the past several months and there are times when no shares are up for sale at any price. Because of this, I plan to offer up a few of my shares at $1 and above. Not because I feel that's a good price to sell (I did the last time, but that was before Q2 was released), but because I want to ensure a market for these shares so that people don't get discouraged and ignore PJT's great growth because they can't buy into it. So for full disclosure, if you plan to purchase at $1 and above, there's a chance you could be buying a bit of my shares. But I assure you it's not because I want to sell out of my position. Sacrificing 10% or so of my holding in order for PJT to be valued at a more reasonable price is worth it to me.

    Based on these financials, a stock price of well over $1 for PJT seems very reasonable to me and upon investors doing their own research, I'm confident many others will feel the same.

    Jul 25 9:31 AM | Link | Comment!
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