Subject: Zedcor (TSX.V: ZDC) A Rapidly Growing Business, That's Displacing Traditional Security Solutions

Zedcor (TSX.V: ZDC) A Rapidly Growing Business, That's Displacing Traditional Security Solutions

Opening Note:

We have been tracking Zedcor since $0.42, at which time we thought the business was close to a no-brainer, trading at a decent valuation, and a price below their last private placement. Additionally, there was strong insider buying to support the valuation, and while the insiders are continuing to buy, the valuation has increased diminishing our higher margin of safety. At the time of the initial starting position announced on August 17, 2022, of $0.42, the valuation has increased from $29.7M to $46M or a change in the P/E ratio from 12.5x to 19x.

Although the valuation has increased, given the current rate of growth, combined with Zedcor’s stated growth strategy, we are waiting for the valuation to catch up with fundamentals in the coming quarters. Moreover, this write-up is to highlight an opportunity we think is compelling, and worth monitoring closely for either a pullback in price, a cross of stock, or waiting for fundamentals to catch up to the valuation. It should be noted, there’s going to be some financing to support the growth, and usually when a company is financing, shares can be more volatile, creating a potentially better entry opportunity.

We intended on having this report out earlier, and adding the company to our Select Portfolio list, but have held off given the price change. However, with this report in hand, we wanted to share a note for our valued subscribers to gain a better understanding of this opportunity.

Zedcor Security Solutions Corp.

TSX.V: ZDC | OTC: CRFQF

Website: https://zedcorsecurity.ca/

Current Price: $0.65

52 Week High/Low: $0.65 / $0.30

Average Volume: 20,385

Shares Outstanding: 70,892,259

Options: 5,399,997

Warrants: 7,361,870 (4.74M at an exercise price of $0.12 & 2.6M at an exercise price of $0.70)

Fully Diluted: 83,654,126

Insider Ownership: 44%

Market Cap: $46m

TTM Revenues: $19.76m

TTM Net Income: $2.39m

TTM Adj. EBITDA: $6.15m

P/S: 2.3x

P/E: 19x

P/EBITDA: 7.5x

Debt: $11.0m in bank debt + $3.2m in a note payable to a related party

Cash: $1.1m

The Company

Zedcor Security Solutions is a provider of custom-based security solutions, encompassing both mobile & temporary, fixed or permanent solutions and offering 24/7 live monitoring and other security solutions to customers across Canada. The company's head office and surveillance center are located in Calgary, with equipment and brand servicing centers located in Vancouver Edmonton, Toronto, and Ottawa.

The company emerged after a comprehensive restructuring of an oilfield rental business that saw the rental business sold off in May of 2021 for $11.5m to focus on the security solutions business that was developed within the larger business. The company substantially reduced its debt load during this time as well as the interest charged on its debt:

The capital structure was also cleaned up with a preferred share class of shares retired for common, as well as an outstanding dividend obligation associated with the preferred shares.

Zedcor has been heavily investing in growing its fleet of security towers under the brand name MobileyeZ, the company is currently up to 440 electric, diesel, solar & hybrid towers, up from 265 at the start of 2022 which was up 77% from the prior year. Zedcor's goal is to have over 800 towers by the end of 2023. Each model provides something slightly different:

Solar Hybrid – these units are self-contained and are powered by solar with a battery & diesel charging backup if not enough sunlight. Customers with large infrastructure projects such as pipelines and roads have preferred this model
Electric – these units piggyback off customers with a regular power source or an on-site generator. Construction industry customers have preferred this model
Diesel – these can double as a power source while also providing security

Management has indicated that they don't have a large mark-up on the hardware as the real value is in the ongoing relationship and monitoring, utilizing a "razor/razor blade" type model with strong margins on the surveillance and monitoring being the real driver of company profitability. Once installed at the customer site, the tower has long-distance cameras for surveillance, the ability to communicate with intruders with voice warnings, and communicate with police or security. Surveillance is handled centrally through Calgary and is operated on a 24-hour/7 day basis as a "big brother, eye in the sky".

Zedcor is flexible in developing a security strategy for customers. Customers can either rent or own the equipment, traditionally on a 2-3 year basis. Operating costs can be quite low as they can utilize onsite electricity or the Internet if available. Zedcor also utilizes more traditional methods like trained security personnel as well if desirable by the customer. It also offers sensor technology for more specialized equipment to detect changes in the environment; this is most notably useful on pipelines.

Financials

Industry/Market Overview

The industrial security market can largely be split in two by the size of the customers – "mom and pop" small businesses and medium to large businesses. Smaller businesses don't need to spend money on surveillance as they can look after their facilities. Medium to larger businesses have more complex operations, both in size and location, which require more flexible and scalable security solutions. In some cases, these locations may be very remote or without power on-site. These require more specialized solutions. Zedcor's solutions have been utilized in operations such as mining sites, construction, oil & gas wells, warehouses, pipelines, auto lots, and auction houses.

Management estimates the total addressable market for Video Surveillance as a Service (VSaaS) to be $83.1B by 2030. With inflation contributing to higher costs in almost all areas of the economy, including surveillance, and potentially higher crime rates, the need for cost-effective monitoring will become even more important for companies.

Competition

Most competitors compete in either the surveillance or the hardware area but not both. There are a lot of smaller operators with 5 to 10 units, which doesn't match the scale that Zedcor is aiming for. The two main Canadian competitors noted by Zedcor management include Stealth Security, with a base in Toronto, and Radius Security, based in Richmond, BC. Radius employs a similar type of mechanism as Zedcor's MobileyeZ, which it markets as "Redhanded" and is targeting some similar types of customers as Zedcor. Radius appears to be private, which gives it somewhat fewer fundraising options than Zedcor does, but it has already opened a U.S. operation in the Dallas-Fort Worth area in an expansion effort.

Management / Board

Zedcor management has been involved with the establishment of Zedcor's security business as well as its predecessor incarnation. CEO Todd Ziniuk founded the oil and gas rental business and ran it since 2018 before taking over the security business. COO James Leganchuk has been with Zedcor since 2011 and has been instrumental in developing the architecture behind the business to allow it to pivot to the security business. CFO Amin Ladha is new to the company since March 2020 but was instrumental in the financial restructuring and has experience in raising both equity & debt in the public markets, which will serve Zedcor well going forward.

The Board is very invested with 43.7% insider ownership. This is held primarily by Dean Swanberg who has continued to add to his ownership of the company through the conversion of both preferred shares and the dividends outstanding on them. Mr. Swanberg was key to developing Zedcor's predecessor rental business so has both industry experience and contacts to support the current management team. The rest of the Board has a lot of experience in both the oil & gas and financial industries.

Next Steps

The company recently opened branches in Toronto & Ottawa in Q3 with plans to open a second monitoring station in Q1 2023; 10% of their MobileyeZ fleet is now located in Ontario. As we can see by Zedcor's projections, they have an extensive plan to increase their available resources:

Zedcor is expecting to have 10 branches across Canada by the end of 2026 while expanding to two states in 2023 with a goal of 8-10 branches by 2026. This won't be cheap, with management putting a price tag of $10.5m in 2023 and $22m in 2024 for capital investment to support this expansion. The company anticipates a capital raise in 2023 to support both the expansion plan for MobilEyeZ as well as the establishment of infrastructure for the additional branches. Management has indicated they are not averse to M&A to expedite growth plans and have the management experience to support that at both the management & board levels.

Valuation

Zedcor has been posting substantial growth in revenue for the last 8 quarters and has hit critical mass with profitability and margins both improving over that same period. With the company undertaking a substantial capital program already to expand its available backlog, EBITDA doesn't serve as a great metric since the add-back of depreciation will be offset by the capital requirements the company will have going forward so looking at price to earnings and price to growth are more relevant metrics.

The company has grown revenue at a 56% annual clip since 2018, and with its aggressive growth strategy, we expect high rates of acceleration to continue.

Catalysts

The biggest catalyst will be getting Zedcor's story out to more investors. Its current investor base is a substantial amount of insider ownership through the board, along with some high net worth (HNW) individuals, and the remainder being retail. The very low trading volume indicates that the story is not publicized yet. This is likely to change in the next year with the company having some substantial capital requirements and management indicating that a capital raise is likely in 2023. With IPOs and capital raises becoming less frequent due to the bear market in tech, there should be an appetite for their capital raise which should also bring analyst coverage by sell-side analysts to help win their business.

Continued growth financial performance that validates management's plans should also continue to catalyze the underlying shares. The underlying market environment looks very good for Zedcor, along with its expansion plans. Similarly, continued market wins like the recent win of a pilot deal with the largest Canadian auction house may start to get investor attention.

M&A could also serve as catalysts. With most of the other security providers being small and private, Zedcor should be able to use its public shares as a cheap source of capital to acquire companies at private market multiples which should on its own be accretive to the company while accelerating their growth plans.

Risks

Zedcor's plans are very ambitious with a substantial amount of capital required in just the next two years alone being near the current market cap of the company. This will require a comprehensive capital solution as it appears to outweigh the cash flow incoming for the company. There will be execution and inflationary risk to this strategy which could see costs escalate higher than anticipated, but Zedcor is not the only company facing this risk. There’s strong financing risks as well given Zedcor’s stated growth commitments, where the company will need to raise capital to purchase new capital equipment to expand its revenues. Lastly, Zedcor has been supporting the TSX pipeline contract which is could create a short-term drop in business as the contract is expiring, adding to the potentially cash-burn as they replenish the loss of revenues.