Seeking Alpha

Monopoly Portfolio Built On First Movers - Who's In And Who's Out

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Includes: DUOT, FLYLF, GNSS, IRMD, OSSIF, SYATF, ZYXI
by: Sergio Heiber
Sergio Heiber
Special situations, event-driven, newsletter provider, small-cap
Summary

This article is an update on my monopoly stocks.

These companies have no direct competition, but I learned that doesn't mean they will dominate their respective markets.

I added some new criteria for evaluating these stocks.

Companies establishing a new market solution and are first movers need to establish proof of concept, a road to profitability, industry connections to build brand awareness, and create a barrier to entry.

In this article, I outline which companies are doing all of the above and which companies aren't able to.

I started building a monopoly portfolio in April made up of publicly traded stocks of companies that have no direct competition. These companies are somewhere past proof of concept and on the road to profitability or already profitable. I have written bullish articles on each of the stocks mentioned in this article. Together as a group these stocks have not yet produced very good results, however I believe that I am on the right track to building a monopoly portfolio that will provide better results.

The portfolio is made up of companies that offer a unique medical device or a unique software solution. All of these companies have high-margin recurring revenue models. I've learned that although a company may offer a one of a kind solution, there are key elements that must be included to successfully penetrate a market. These companies must create and grow a competitive moat and have a solid and consistent business model that includes increasing brand awareness and beefing up their sales channel as they scale.

Performance

Overall, the portfolio has returned 1%. Eliminating OTCQB:DUOT and OTCQX:FLYLF from the portfolio would result in a positive return of 10%. I used prices from the time of my first article on when each respective stock was published and explain why I should have avoided FLYLF and DUOT.

Stock Publication Price Current Price % Change
DUOT 0.70 0.50 -29
FLYLF 1.04 0.92 -26
GNSS 2.56 3.21 25
IRMD 18.39 24.33 32
OTCQB:OSSIF 0.54 0.45 -17
OTCQX:SYATF 0.36 0.23 -37
ZYXI 5.28 8.27 57

Below is a review on why I remain bullish on some of the stocks mentioned and why I moved others to the sidelines.

Duos Technology

Image result for duos technology

Duos Technology has a suite of products that apply video analytics, machine vision algorithms, neural networking, machine learning, and artificial intelligence that can be applied to various industries. The company has turned its focus to the railroad industry. Automated railcar inspection portals ("RIP") along with deep learning and AI-based software, TrueVue360 are the company's main products.

RIPs inspect freight railcars in seconds as the cars enter railyards. The portals are quicker, cheaper and more efficient than human inspection. Automated railcar inspection is not yet permitted by law in the U.S. where regulations require 65 inspection variables. Duos has made commercially available six inspection variables, but has completed machine learning for 22 variables and expects to have 65-90 variables available by the end of fiscal 2020.

The company has sold RIPs to three tier 1 North American railroad companies and receives recurring revenue for inspection data. When I first begun coverage on Duos, there was no other company that had sold an automated railcar inspection system. Since then, Trimble (TRMB) has sold automated railcar inspections systems in Europe. Duos remains the only company that has sold an automated railcar inspection system in North America.

Management guidance points to record revenue for this fiscal year and profitability and record revenue for fiscal 2020. The company has filed for an uplisting from OTC to Nasdaq. All bullish developments, but I recently took a neutral position due to my most recent conversation with management that resulted in just too many unanswered concerns:

  • Canadian National (NYSE:CNI) has delayed adding more RIPs this quarter.
  • Legislation allowing automated railcar inspection in the U.S. is at least a year away.
  • Management plans have lacked consistency. I was told that there would be no capital raise without simultaneous uplisting and two acquisitions. I've written articles and made investment decisions based on my discussions with management. When this information does not hold up, I feel compelled to present this to my readers as my articles on this stock are now not accurate.
  • An application for uplisting has been filed as has a capital raise. Acquisition plans have been delayed for further evaluation after uplisting is completed. There's no reason for a change in strategy other than management indecision.
  • The company has not developed a pricing plan for its inspection service despite having a dozen RIPs in operation. This is the recurring revenue highlight of its business plan so why isn't there a pricing plan?
  • There are many industries where sensor technology and artificial intelligence are being applied to. Why hasn't management pursued to partner with a large company involved in railroad technology like Bombardier (OTC:BOMBF), Siemens (OTCPK:SIEGY) or Mermec for railroad inspection and compete in other industry opportunities also via larger partners?
  • Besides lacking partners, no industry experts have been added to the team.
  • Outstanding warrants potentially double the share count and the company is adding debt according to the uplisting press release.

I do think that Canadian National may eventually add more RIPs at more of its railyards, that legislation will pass allowing for automated railcar inspection and that Duos will meet its stated financial targets for this fiscal year. I may return as an investor depending on future developments, but I am concerned that Duos management strategy is missing clarity and immediacy as well as a lack of building industry credibility, and I am concerned about its ability to reach profitability due to the share structure and debt position.

Sensor technology combined with A.I. is being applied in many industries. First movers need to move quickly to build a moat against competitors. Duos may not be moving fast enough, lacks focus on attacking lateral markets, has only one market partner who has put the brakes on expanding the relationship and has given competitors an opportunity to catch up. That's why I sold my shares, but have hopes that it learns from the mistakes and can recover from the errors that I think it is making.

FLYHT Aerospace Solutions

Image result for flyht aerosapace solutions

FLYHT Aerospace Solutions is the only company that offers in-flight satellite communication for airplanes. The company is seeking to capitalize on the lack of communication infrastructure in interior China where pending legislation mandates constant in-flight communication. China is expected to be the leading aviation center in the world within the next three years. It's not just China that's adding planes. The global outlook is that almost 50K new planes will be added over the next 20 years. Similarly to China, Australia, most of Asia, South America, and Africa offer vast territory that lacks infrastructure and would have to rely on satellite communication for black box connectivity.

FLYHT offers real-time in-flight weather information as well as engine monitoring. The company claims that it saves airlines money by improving fuel mileage and reducing repair costs. Repairs using their service are only done on as needed basis and downtime for repairs is greatly reduced as repair preparation can be made in advance of a plane landing.

I've been very impressed by the CEO, Tom Schmutz, who engineered a deal to acquire the weather forecasting assets, customers and backlog from Panasonic Avionics in which Panasonic paid FLYHT. Fellow SA contributor Christopher Hampton did an excellent job in describing this deal in FLYHT: SaaS For Airlines And The Most Extraordinary Acquisition I've Seen.

Mr. Schmutz has guided FLYHT to a partnership with L3 (NYSE:LHX), a partnership with Synoptic and collaborations with Boeing (NYSE:BA) and has changed the business model of the weather business. Instead of competing with government agencies providing weather services, FLYHT now sells the data collected to the government agencies. The plan works because the more data collected, the better the analytics.

While I think the company has done everything right, there isn't any progress in the Chinese legislation. The major Chinese airlines are mostly government owned. The effective date of legislation keeps getting pushed back as the government accommodates itself. Meanwhile, there hasn't been any new customers in almost a year, and that concerns me because this lag allows for competitors to catch up to FLYHT's early lead and competitors include many much larger companies.

I really like this company and how it has been put together. It's a great business plan in how it can sell the same weather data to multiple customers and how well the weather and engine monitoring systems can coincide. I'm on the sidelines for now on this stock, but watching for developments.

Genasys Technologies

Genasys has historically been an acoustic hailing device ("AHD") company named LRAD Corp. Two years ago LRAD acquired Genasys, a provider of location-based mass messaging solutions for emergency warnings with the intent of offering a complete mass notification hardware and software solution. The acquired company manages the countrywide mass notification system for Australia.

LRAD Corp. has rebranded as Genasys and is currently the only company able to provide a public safety system that combines unified voice and digital communications in a single platform, but this company hasn't yet been recognized by the marketplace. Industry reports such as Mordor Intelligence, OMR Global, and Transparency Market Research mention AtHoc, Inc., Everbridge, Inc. (EVBG), Eaton Corporation Plc. (ETN), Honeywell International, Inc. (HON), International Business Machines Corporation (IBM), Siemens AG, and Metis Secure Solutions as the dominant players with no mention of Genasys.

The stock price isn't rising despite the success in both AHD and mass notification sales. Genasys has reported record AHD sales and has been awarded mass notification systems in three California cities as well as the FEMA sponsored contract for a mass notification system for Puerto Rico. The initial phase of the contract for Puerto Rico was worth a million dollars and has been completed. I expect that Genasys will be awarded the island-wide mass notification system award which is worth double-digit millions of dollars.

There are many opportunities pending as legislation across the globe require countrywide mass notification systems. The European Union has mandated that all members have a working mass notification system by June 2022. The Natural Disaster Management Authority of India has initiated a cyclone warning mandate similar to Japan's Tsunami alert system.

Genasys is a rare find in the micro cap space. I've written several articles discussing the company's high growth, no debt, high percentage of institutional investors and growth with zero share dilution.

The company needs to establish leadership in its targeted market and will need to win a major notification system award to lay a foundation to make that claim. There's a ton of companies that offer only the software portion of emergency notification and label themselves complete solutions, and there have been companies partnering up to deliver systems, but no company has the capability to match Genasys' one platform unified solution.

The company's dominance in AHDs, which are used as the speakers for their emergency notification systems, provides a moat and barrier to entry for competitors. Genasys has partnered with the Federal Emergency Management Agency ("FEMA") and brought on industry veterans such as one of the Ad Hoc cofounders, Ly Tran, created and filled a new VP of sales position and added sales staff. The company has over $20 million in cash available, and I would not be surprised if another software company was acquired to further enhance its product.

I remain long and bullish on Genasys because I think that there been good progress in the short time that it has offered a full mass notification solution and that management has placed the company where it should be in both the hardware and software sides of the business. When and if it wins a double-digit award, the stock price will pop. I do think it is very close to a major win in Puerto Rico to get things rolling and in the meantime the fundamentals are solid.

IRadimed Corporation

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IRadimed is the only provider of non-magnetic MRI products. Revenue and earnings have been growing robustly. The company has reported four consecutive quarters of record revenue and improving margins and recently resolved its FDA warning notice as well as completed its European CE renewal process.

The main product is non-magnetic MRI compatible pumps. These pumps are used to sedate children and for patients too sick to be removed from medication while undergoing MRI. Absent IRMD's pump system, options available include avoiding MRI, using long pipes to a pump system outside the MRI room, or protecting the pump system inside a box. IRMD eliminates the clumsiness as well as dangers from those procedures.

According to the Investor Presentation the addressable market is worth over $2 billion. And there isn't another company that offers a similar product. Other companies have tried to enter this space but have failed to maintain regulatory approval and that is the moat and barrier to entry here. It is unlikely that a competitor will arise.

The company bundles its pump sales with a non-magnetic MRI compliant patient monitoring system, MRI compatible Oximeter with remote control, disposable components and various available upgrades and offers extended maintenance contracts. The disposable components and maintenance products provide recurring revenue which by my accounting makes up 30% of the total revenue.

IRMD has complete dominance in MRI compatible devices and accessories. The company introduces a new product every year. Some of the new products are not exclusive to IRMD, but sell well as they are bundled with the pump. MRI usage is considered safe and on the rise with units being added throughout a medical center instead of just in a specialized MRI clinic. I remain very bullish on this stock.

OneSoft Solutions

Image result for onesoft solutions

OneSoft is the only company that applies artificial intelligence and predictive analytics to forecast O&G pipeline failure. The main product is Cognitive Integrity Management ("CIM") software for piggable pipeline analytics sold through the Microsoft (MSFT) reseller channel. Pipeline accidents are frequent and costly. There have been zero reported faults in pipelines under CIM management.

OneSoft has excelled in establishing partnerships and collaborations with larger companies such as Microsoft. Management has created a wide moat for competitors by amassing "the most extensive aggregation of data and learnings collected by anyone in the O&G pipeline industry to date," as stated in the recent MD&A. This collection has taken over two years to compile through a partnership with Phillips 66 (PSX) which provided OneSoft with pipeline data to analyze. A potential competitor to OneSoft would need to develop software, find a partner willing to provide pipeline data and then take the time to implement machine learning and A.I. capabilities from the data.

CIM reviews data on millions of variables. Customers are charged a recurring fee. The company has 51,000 pipeline miles under contract which are sufficient for profitability. OneSoft is well funded with a reported over $11 million in cash and zero debt as of the end of Sept. The company is undergoing pilot programs for new customers and developing a complementary product to CIM for non-piggable pipelines.

OneSoft has been consistent and on course with its game plan since I first learned about this company. I remain long and bullish and believe that the company has validated its technology and is ready to transform from a start-up to a growth company. At the same time, I realize that there are competing methods for pipeline technology. It remains to be seen how much of the O&G addressable market OneSoft can capture and will it be able to penetrate adjacent markets such as waste and water pipelines.

Siyata Mobile

Image result for SIYATA MOBILE

Siyata Mobile is the only company offering an in-vehicle wireless communication solution for commercial vehicles such as taxis and trucks and for first responders such as police vehicles, fire vehicles, yellow school buses and ambulances. The devices eliminate the need for separate navigation, phone, fleet management, and mobile radio components. The products are sold through Tier 1 wireless carriers in Israel, New Zealand, Australia, Saudi Arabia, Canada and the U.S.

The company's largest addressable market is the U.S. where sales were launched just a few months ago. Siyata now has a sales network of two Tier 1 wireless carriers in the U.S. and sales have been brisk. Revenues of $5 million (Canadian) were reported for the third quarter. Press releases for this quarter add up to almost $5 million in revenues for this quarter as well.

It took two years for Siyata to win certification from each respective U.S. Tier 1 wireless carrier, which gives it a head start and perhaps a barrier to entry for a potential competitor as well as product validation. Siyata is also the only company to receive certification from First Net for an in vehicle communication device.

I believe that an independent research firm is going to initiate coverage with a buy rating in January. The stock price has been near a 52-week low, probably due to the several capital raises that the company has undergone to fund product rollout. I am pleased with the execution of the company plan and remain long and bullish.

Zynex Medical

Image result for zynex medical

Zynex Medical manufactures and markets FDA-approved electrotherapy devices and related supplies for the treatment of chronic and acute pain and for muscle rehabilitation.

The company has no direct competitors but is not the only pain and muscle rehab solution. Electrotherapy has some potential side effects but instead of masking pain, it can be used to alleviate pain by retraining muscles. Electrotherapy is offered as an alternative to opioids for pain management.

The company has taken advantage of the void left by former competitors and has been escalating its sales force. Results have been spectacular with year-over-year revenues almost doubling. As the company scales, it has added on to its management team. In Feb. a new position of VP of Sales and Marketing was created and filled. In July, a new Chief Operating Officer position was created and filled.

I'm going to be brief as ZYXI has been well covered on SA by bulls, a bear and even a bearish bull so readers can get more viewpoints than are usually available. The bull case is the tremendous growth. The bear case is that the company sells supplies at unreasonable prices and the bearish bull case casts doubts on management. Readers will draw their own conclusions. I am long and bullish on ZYXI.

Conclusion

In compiling my monopoly stocks portfolio, I've learned that just because a company offers a one-of-a-kind product does not mean that it will dominate its addressable market. I've added criteria for inclusion in this portfolio which I will apply to future potential additions and expect to improve my overall portfolio return.

The stocks discussed in this article have the potential and in some cases are already experiencing phenomenal growth. Readers are advised that these stocks are micro and small caps with lower daily trading volumes than large-cap stocks and are therefore subject to greater trading volatility and that these stocks have wider bid and ask spreads than larger cap stocks. Please refer to my previous articles and respective company material for more details on risk, balance sheet and valuation.

Disclosure: I am/we are long GNSS, OSSIF, IRMD, ZYXI, SYATF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.