| | Smallcap Discoveries: Recurring Revenues and Solid Downside Protection - Our Latest Pick |
|
AirIQ Inc
IQ-TSX.V / AILQF: OTC
Current Price: $0.23
52 Week Hi/Low: $0.375 / $0.14 |
| | Average Daily Volume (3month): 108K Issued and Outstanding: 29,828,947 Options: 2,196,127 Fully Diluted: 32,025,074 Market Capitalization: $7M Insider Ownership: 10% - 2,987,275 Institutional Ownership: 19.95% TTM Earnings: $713K
TTM Revenues: $5.04M TTM EBITDAS: $907K EV/EBITDA: 5x P/E: 10x P/S: 1.4x Debt: $Zero Cash: $2.2M or $0.07 per share Last Financing: 2013 - $385K at $0.05
Highlights - Six years of profitability
- Normal Course Issuer Bid
- Strong share structure
- $2.2M in cash and no debt – has not diluted since 2013
- Growing recurring revenue business
- Undiscovered
What is AirIQ?
AirIQ is a Canadian telematics company based in Pickering, Ontario. Since 1997, AirIQ has been a pioneer in the field of wireless asset management and location services, providing North American customers proven end-to-end wireless Global Positioning Service (GPS) solutions. The Company offers a suite of asset management services, end-to-end wireless solutions, which allows operators for fleets of delivery trucks, service vehicles and rental or company cars the ability to monitor, manage and protect their mobile assets on a simple and cost-effective basis.
Services are available online or via a mobile app, and include: instant vehicle locating, boundary notification, automated inventory reports, maintenance reminders, security alerts and vehicle disabling and unauthorized movement alerts.
What's the business model and how does it work?
Could you imagine operating a business which included a fleet of rental cars or delivery trucks? Managing the employees and tracking their time is a nightmare and can be costly to the bottom line. But how about managing the expensive assets?
AirIQ’s combined hardware products and software solutions provide the end-to-end platform for their customers to cost-effectively manage their expensive assets. As an example, in 2013, one of AirIQ’s customers, a large rental car business based in Texas, was able to achieve a 145% return on investment in just one year after implementing AirIQ’s solutions.
The rental car business had reported losing a total of six vehicles and wrote off more than $100K in losses, but after installing AirIQ’s solutions announced they had gone an entire year without losing a vehicle. After installing AirIQ’s solution, not only was the customer not losing expensive assets but has also improved utilization and customer satisfaction by easily managing and monitoring their fleet to quickly identify any issues or problems with a rental. This customer was using AirIQ’s Plug & Track™ device, which allows easy install and makes transfers of the unit from one vehicle to another simple and fast. AirIQ’s solution was able to provide several benefits for their customer including: - Real time location notification
- When the vehicle was overdue
- If the vehicle has crossed a border or travelled outside of a specified boundary
- Vehicle maintenance is due or to view the vehicle’s odometer
- If the vehicle has been stationary for over a set period
AirIQ’s rugged hardware products are designed for all weather environments and have Company backed warranties. These hardware devices are installed into the customers assets, where the devices serve as the communication endpoint using GPS technology. AirIQ's Online™ system is a web-enabled platform that provides users access to their assets information, complete with maps and detailed locations.
AirIQ’s revenues are primarily earned from the sale of GPS hardware devices and from the wireless airtime fees for communication from the hardware devices. Therefore, for each incremental sale of hardware products there is a corresponding increase in airtime fees. Revenues from hardware components are recognized upon delivery and revenues from airtime fees are recognized as services over the life of the contract as services are provided. Typically, AirIQ’s customers are supported by a two to three-year term service contracts with options to renew thereafter.
In Fiscal 2020, 58% or $2.94 million of the total revenue was classified as recurring revenue. The Company is focusing its efforts and resources on revenue growth and profitability by continuing to offer leading-edge technology solutions for existing and new customers. Looking forward, monitoring the hardware sales will serve as a leading indicator for growth in AirIQ’s recurring revenues, which we believe is the crown jewel of the business.
What’s changed? Why now?
AirIQ is a classic example of a microcap company that tried to grow too quickly. After becoming a public company in 2002, AirIQ was rapidly expanding, leaning heavily on the capital markets to pay for its acquisitions. Revenues ballooned, peaking at roughly $40 million, but the Company was not achieving profitability. As investor appetite waned, the Company began financing its operations through a series of debt financings and eventually hired bankers to strategically review the direction of the Company. At that point in time, the Company began divesting of its assets, selling multiple pieces of the Company to raise capital.
By 2012, AirIQ’s business had been scaled down to only a couple million in annual sales, and under new management, consolidated the shares on a 10/1 basis. After a few financings, both debt and equity, AirIQ achieved positive EBITDAS, a milestone it had not achieved in six years. In 2014, Mike Robb, formerly a consultant with the Company, became the CEO of AirIQ. Finally, by the end of 2015 AirIQ announced a full year of operating profit for the first time in Company history. Under Mike Robb’s leadership, AirIQ has been profitable every year since.
Share Structure
AirIQ currently has 29,828,947 shares issued and outstanding and 32,025,074 on a fully diluted basis. The executives own 2.98 million or roughly 10% of the Company. The two insiders that own those shares are, Vernon Lobo (2.17 million) and Michael Robb (816K).
AirIQ does have institutional ownership, with Mosaic Capital Partners owning 5.94 million shares or just under a controlling position of 19.95%. It should be noted that Vernon Lobo is currently the managing director of Mosaic Capital Partners.
Vecima Networks Inc (VCM-TSX) a Canadian telematics company with roughly a $250 million market cap, owned 6.37 million or about 21.37% of AirIQ as of the last information circular. However, Vecima has been selling shares in the open market. On that note, there was a 3 million shares cross on Friday 24th, 2020 and there’s roughly 1 million shares left – which is also likely to be purchased.
Therefore, the total insider ownership, including the executives and Mosaic Capital Partners is roughly 8.9 million shares or 30%. Which leaves a public float of roughly 20.9 million
|
| | | Air IQ has been a profitable business for the past six years, maintaining profitability in each quarter except for Q4 in 2018. Fiscal 2020 was a breakout year with a record net income of $713K for the year.
Revenues have been consistently trending higher from 2013 to 2020, with a steady CAGR of 10% over that period. However, fiscal 2020 was a breakout year where revenues increased by 37% to $5.04 million.
Margins have been steady, fluctuating between 50% to 60% depending on the breakdown of revenues.
It should be noted, that while Air IQ had an exceptional growth year in Fiscal 2020, we are not expecting the same growth on a year over year basis for Fiscal 2021.
It is critical to understand the two revenue segments: hardware sales and recurring revenues.
Our understanding of the business model suggests that hardware sales are a leading indicator and act as a precursor for recurring revenues. For each additional piece of hardware Air IQ sells, there is an increase in the net annual recurring revenue.
We believe that the recurring revenues are more valuable and recognize that if the ARR figure is consistently increasing, the value of the core business is also increasing - irrespective of total yearly growth figures. Therefore, we expect years of both higher and lower revenues which reflect the Company’s hardware sales activity. Most importantly our focus will be on ARR revenues as our indication on the health and long-term performance of the Company.
|
| | Highlighted above is a breakdown of annual revenues, segmented for hardware sales and recurring revenues. In fiscal 2020, Air IQ had an ARR figure of $2.94 million which has grown from $1.96 million in 2017 or about an 11% CAGR over that period.
Given the current market cap for Air IQ of $7 million, we think based on the recurring revenue business alone, AirIQ is cheap trading at roughly 2.4x, and even cheaper if you take-out the cash pegging the multiple at roughly 1.6x. The recurring portion of the business is the crown jewel and what provides an exceptional amount of downside protection for this investment thesis.
|
| | Based on fiscal 2020 numbers, Air IQ is trading at price-to-earnings of 10x and a price to sales of 1.4x. EBITDAS for the year was $907K which pegs the EV/EBITDA multiple at about 5x. The business has a strong balance sheet with zero debt and $2.2 million in cash. Working capital is roughly $2.29 million providing enough liquidity for the Company to continue its growth trajectory, supported by strong cash-flows of $1.92 million from operations for the year. The book value of the business is roughly $2.3 million or about $0.07 per share.
What to look out for?
A few risks and key items to be mindful of. Firstly, as earlier noted, the growth trajectory. We do not anticipate yearly growth to be at the accelerated rate demonstrated in Fiscal 2020.
In October of 2019, the Company increased its credit facility with Royal Bank of Canada to $750K to better situate itself for potential mergers and acquisitions. AirIQ made a small acquisition in 2017 and since then has not made any further acquisitions. Given the Company history, notably under different management, the poor acquisition strategy was one of the primary reasons for the downfall of AirIQ’s business and we are closely monitoring any future acquisitions.
Research and development are long-term investments for the Company. While the Company has a modest R&D expense each year, we do recognize technological innovation is rapidly accelerating. AirIQ is operating in a niche and there’s potential risk that a large, well capitalized company could disrupt AirIQ’s business from technology advancements.
AirIQ has had legal challenges in the past regarding patents and patent infringement cases. If there are material legal challenges it may break the investment thesis. We are actively monitoring for any legal issues that arise.
Final Thoughts
We think AirIQ is an inexpensive Company that is trading at a cheap enough valuation to warrant a position. At this valuation, there’s adequate downside protection based on the low multiple from the recurring revenue business segment. In addition, the balance sheet has strong liquidity with zero debt and healthy amount of cash.
With a strong balance sheet and stable recurring revenues, AirIQ should be relatively safe under weaker economic conditions. In addition, the growing cash reserve and no debt provide optionality for the Company to take risk and pursue growth targets.
Management has demonstrated fiscal responsibility by achieving cash flow profitability and has executed a successful turnaround. Shareholder interests are aligned with the executives who own roughly 10% of the Company, earn modest salaries, and have not diluted their shares since 2013.
The business model is robust and scalable, where a combination of hardware and software products are generating high margins and strong cash flows. An increase in research and development costs are expected in the future, and while these costs impact profitability in the short-term, ultimately provide customers with leading edge technologies to drive long-term growth.
AirIQ has a strong share structure, where incremental profits will have maximum leverage for shareholders. Given the small public float, if the Company is discovered by larger investors and institutions, the tight structure will help increase the odds for the Company to become overvalued. In addition, AirIQ has an accepted NCIB in and is actively buying back its shares, further decreasing the public float.
We do not anticipate yearly growth to be at the accelerated rate demonstrated in Fiscal 2020. However, we do recognize that higher growth years will ultimately result in the growth of the annual recurring revenues. Therefore, while monitoring future growth trends, we recognize the Company is likely to not meet our 25% growth criteria, but make an exception based on the conclusion that the net additions to ARR are more valuable.
AirIQ is undiscovered and early in the discovery lifecycle. With a market capitalization of $7 million, and only $5 million in sales, we are expecting this to be a long-term holding until the Company becomes more discovered – barring no negative or material changes to the business. At the current valuations we think AirIQ is a strong buy up to $0.30.
Recent Headlines
- 2020 - AirIQ Announces TSX Venture Exchange Acceptance of Normal Course Issuer Bid
- 2020 - AirIQ Announces Additional Purchase Order from Major U.S. Customer $110K
- 2019 - AirIQ Announces Additional Purchase Order from Major U.S. Customer $450K
- 2019 - AirIQ Announces Launch of New ELD Solution
- 2019 - AirIQ Announces Additional $1.3M Purchase Order from Major U.S. Customer
- 2019 - AirIQ Announces AEMP Telematics Integration with AirIQ Fleet™
- 2019 - AirIQ Announces Additional $220K Purchase Order from Major U.S. Customer
- 2019 - AirIQ Announces $545 Thousand Purchase Order from Major U.S. Customer
- 2019 - AirIQ Announces TSX Venture Exchange Acceptance of Normal Course Issuer Bid
Financing History
- 2013 - AirIQ Announces $485,000 Financing – 100K loan – Mosaic - $385K PP $0.05
- 2012 - AirIQ Announces $300K Financing and Issuance of Shares for Debt to Directors – Donald Gibbs and Mosaic – 15% - $150k PP $0.08
- 2011 - AirIQ Announces Private Placement and Stock Option Grant - $415k $0.15
- 2011 - AirIQ Announces Filing of Rights Offering Prospectus - 8,707,374 Common Shares - $1,306,106
- 2010 - AirIQ Announces $500K Debt Financing – 15% - Mosaic Partners
- 2009 – AirIQ PP with Mosaic $200K at $0.015
- 2007 - AirIQ Announces Loan Amendments - $1.25M at 20% interest
- 2006 - AirIQ Inc. Closes Second Tranche of $8 million Debt Financings New term loan provides $3 million in additional financing – Wellington Financial – 12%
- 2006 - AirIQ announces $5.3 million bought deal private placement and $4 million term loan – Paradigm Capital - $0.20 Special warrant
- 2006 - AirIQ Inc. Amends Credit Facility
- 2005 - AirIQ Term Loan Lenders Acquire $3,000,000 New Equity Interest on net debt reduces under Royal Bank of Canada facility - $0.53
- 2005 - AirIQ obtains $10,000,000 Credit Facility from Royal Bank of Canada – 6.5%
- 2004 - AirIQ Closes $12 Million Private Placement – GMP Securities & Paradigm Capital - $0.42
- 2003 - $6M private placement – National Bank & GMP Securities $0.45 per unit $0.60 warrant
- 2003 – Term Loan from VenGrowth Capital Partners - $6.2M 12%
To your wealth,
Paul and Trevor are long shares of AirIQ Inc, and believe it is a strong buy up to $0.30 |
| |
