spec. buy $0.40 initiating coverage - beacon securities · 2017. 2. 25. · merlin oee machine...

Beacon Securities Ltd.| 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H1 |416.643.3830|www.beaconsecurities.ca

Astrix Networks Inc. (OEE – V)

July 14, 2015

I Can See Clearly Now

Company Profile

Burlington-based Astrix Networks, operating as Memex Automation is

a provider of business intelligence solutions to the manufacturing

sector.

Investment Thesis

We believe that the relatively robust macro environment for industrial

companies, the large and untapped addressable market, the high

ROI associated with Memex’s products, and its strong traction to

date could enable the company to outperform the organic growth

profile of comparable software peers and drive ongoing

improvements in its profitability profile.

Investment Highlights

- Memex’s Merlin platform provides actionable data on plant-

floor equipment. The data can be used to show how the current

conditions on the plant floor can be optimized to improve

output.

- Memex brings several benefits, which ultimately help to drive a

very quick, and high ROI (a few months in some cases).

o Provides real-time production visibility into plant floor

equipment;

o Analyzes data to uncover reasons for downtime, thereby

helping to maximize production throughput and minimize

job interruptions;

o Analyzes operating and maintenance performance to

find potential issues before they become expensive

problems and helps customers reduce capex spend by

improving utilization rates of existing equipment.

- We estimate Memex’s market opportunity at ~$225B with

adoption rates below 5%, which we believe suggests there is still

significant organic growth opportunities. We factor 85–100%

revenue growth in our forecast period.

- ROI represents a key purchasing decision variable and our

discussions with customers suggest a very rapid payback, which

could help to accelerate adoption of the company’s platform.

- Memex has already generated strong traction with 80 customer

installations most of which are initial small deployments. Over

time, we believe this existing customer base could contribute

another $30M in potential sales as deployments accelerate.

- We are initiating coverage with a Speculative Buy rating and

$0.40/sh target, which is based on our DCF analysis or 5x FY17e

EV/Sales. We feel our target multiple is fair given our forecasted

3-year revenue CAGR of 96% (FY14–FY17e).

-

$0.24

$0.40

67%

YE: Sept FY15e FY16e FY17e

Revenue (M) 1.9 3.5 7.0

EBITDA (M) -2.1 -2.0 -0.1

EPS ($) -0.03 -0.02 0.00

FY15e FY16e FY17e

EV/Sales 11.4x 6.1x 3.1x

EV/EBITDA n/a n/a n/a

P/E n/a n/a n/a

96.3

Shares O/S (FD) 102.4

Market Cap (Basic) $23.1

Market Cap (FD) $24.6

Cash $3.4 $0.03/sh

Debt $0.4 $0.00/sh

EV $21.6

[email protected]

Stock Performance (1 year)

Stock Data (M)

Shares O/S (Basic)

Gabriel Leung 416-507-3963

Initiating Coverage

Prev ious Close

12-month Target Price

Potential Return

Estimates (C$)

Valuation

Company Description

Burlington- based Astrix Networks (operating as Memex

Automation) is a provider of business intelligence solutions to

the manufacturing sector. The company has 80 customer

installations with a strong focus on the aersopace sector

Research Team

Spec. Buy $0.40

Who They Are and What Do They Do?

• Burlington-based Astrix Networks, operating as Memex Automation, was founded in 1992 and

over the years has evolved into a provider of business intelligence solutions for companies in the

manufacturing sector.

• The company’s flagship product, Merlin, is a M2M solution that helps identify plant problems by

capturing real-time production information from factory-floor machines and relaying this

information in real-time visible dashboard metrics for the entire plant floor and management to

see. Inefficiencies can be quickly identified and addressed resulting in improved uptime, reduced

costs, and improved profitability.

• Memex’s solutions are marketed to customers in discrete manufacturing, most notably within

aerospace. It has over 80 installations across 3 continents, and boasts impressive customers

including Magellan, Heroux Devtek, Mazak, Ingersoll Rand and Com Dev to name a few.

• Memex has 29 employees, including 6 in direct sales.

• The company recently (early June) boosted its balance sheet with a $3.9M financing at $0.15/sh.

1Gabriel Leung, 416-507-3963

Investment Thesis

• We believe Memex has developed a compelling (and validated) M2M platform for capturing

real-time plant floor data for the purpose of improving efficiency and profitability. We view this

as a large ~$225B addressable market opportunity, which has been largely underpenetrated.

• In our opinion, Memex’s Merlin platform brings several benefits, which ultimately help to drive a

very quick and high ROI (a few months in some cases):

– provides real-time production visibility (data collection and reporting) into plant floor equipment;

– analyzes data to uncover reasons for production downtime, thereby helping to maximize production

throughput and minimize job interruptions;

– helps to identify potential maintenance issues before they become expensive problems; and

– helps customers to reduce capex spend by improving utilization rates of existing equipment.

• We believe that the relatively robust macro environment for industrial companies, the large and

untapped addressable market, the high ROI associated with Memex’s products, and its strong

traction to date could enable the company to outperform the organic growth profile of

comparable software peers and drive ongoing improvements in its profitability profile.


Bringing Visibility to the Plant Floor


• Memex’s Merlin platform (stands for Manufacturing Execution Real-Time Lean Information

Network) is a Manufacturing Execution System (“MES”) that provides actionable data on plant-

floor equipment. The data can be used to show how the current conditions on the plant floor

can be optimized to improve production output. The company’s platform consists of both

software and hardware solutions (largely used for connectivity).

• One of the main hurdles preventing companies from realizing efficiencies in their operations is

the inability of manufacturing machines to communicate with management in real-time (due to

a diverse range of plant equipment/controllers who all speak different language/protocols).

Merlin enables real-time XML communication, thereby turning any piece of discrete

manufacturing equipment into a webserver.

• Key features provided by Merlin, include real-time production visibility, including alerts through

email or text, production data collection and reporting, labor productivity tracking, usage-based

preventative maintenance, visual dashboards, scheduling and multiple data element collection.

• Ultimately, the company’s goal is to improve communications on the plant floor, which helps to

identify production and potential maintenance issues, thereby allowing management to address

bottlenecks, whether it be equipment, labor or process related.

Bringing Order To Data Chaos


Source: Company filings.

Real-Time Dashboard Analytics


Source: Company filings.

Product Offering Summary


Manufacturing Execution System (MES) Products Connectivity Solution Products

Merlin OEE Machine Monitoring Dashboard Software Ax9150 UMI - MT Connect

Merlin Dynamics AX Connector Ax760 MT Connect

Merlin Operator Portal Ax9150 Universal Machine Interface

Merline ERP Connector Ax650 Control Interface Board

Mx1053 Universal Network Interface

Behind-The-Tape Reader

Highlight Of Memex's Product Portfolio

Source: Company filings

This is a Big Market Opportunity


• There are ~16M computerized numerical control machine tools installed globally, which are

typically supported by 3 other assets

• As such, we view the addressable market for Memex as being represented by 64M assets

• At an ASP of ~$3.5k per asset (i.e. the mid-point of what Memex charges its customers), we

estimate the total addressable market at ~$225B.

• At present, only 2 – 3% of assets are connected so we believe there is still a lot of growth

opportunities for Memex.

• Our discussions with management also suggest that within the company’s existing customer

base, there is an addressable market of ~$30M (i.e. if all customers were to deploy Memex on a

corporate-wide basis).

• Furthermore, we believe the company is dealing with a pipeline of opportunity representing

another ~$30M in potential sales, including some very large opportunities.

Pricing Model and Sales Strategy


• A typical sales cycle for Memex involves an initial pilot (i.e. managing several assets at one plant)

and based on the outcome of that pilot a customer will provide follow-on orders.

• The company sells its products on a per asset basis (ranges between $2 – 5k), along with

modest initial set up/professional service fees. The company also generates annual recurring

maintenance revenues of ~15% of the initial sale.

• The company’s sales effort to-date has been primarily through its direct sales force, which

consists of 6 individuals. We estimate this sales team has the capacity of generating up to $5.5M

in annualized revenues, which is roughly the company’s EBITDA break-even revenue level.

• More recently, the company has partnered with Mazak, which is a large Japanese machine tool

builder (Memex is dealing with Mazak’s North American subsidiary). Mazak initially started off as

a Memex customer with the goal of achieving productivity improvements of 1%. Ultimately,

Mazak was able to realize a 42% increase in equipment utilization. Based on these results,

Mazak also becomes a Memex channel partner, which we believe is a significant validation of

Memex’s value proposition. We understand the company is also in discussions to potentially

partner with several other large tech vendors.

Happy Customers Are Repeat Customers

- In our opinion, happy customers are repeat and become strong reference customers. We believe

this is important for Memex, particularly given the large market opportunity, along with the fact

that customers will typically start with a small deployment and grow over time.

- Below, we’ve highlighted two case studies, which we believe underlines the strong ROI associated

with the Memex story.

- Magellan Aerospace (MAL – T, NR) initially started a pilot installation on 3 assets in one plant,

which saw a $20k investment result in $480k of additional production in the first year and a cost

breakeven at 20 days.

- Our discussions with Magellan suggests that the plan is to move this pilot to a plant-wide roll out,

and then ultimately a corporate roll out (i.e. 600 machines across 14 plants).

- Meanwhile, Heroux Devtek (HRX – T, NR) has seen a 90% increase in OEE (overall equipment

effectiveness) since deploying Memex corporate-wide across its 10 plants, which has resulted in

increased productivity and also a reduction in new machine capex (i.e. given the higher utilization

of existing machines).


Sample Customer List


Source: Company reports.

Financial Analysis


- Revenues are derived from several sources including hardware (revenues recognized once

shipped), installation (once work is complete), software (once installed on customer equipment),

and support (recognized on a monthly basis).

- We are factoring revenue growth in the range of 85 – 100% for our forecast period based on

strong pipeline demand from existing customers, along with early discussions with several large

prospects.

- Gross margins are currently in the ~65% range, although we believe it can move to the 70%

range as revenues ramp (i.e. due to more high margin software revenues and higher utilization of

its professional services team).

- We expect the company to remain EBITDA negative in FY15 and FY16 and exit FY17 in positive

territory.

Financial Analysis (continued)


- On the balance sheet, we anticipate that the company will end fiscal Q3 (ending June) with

~$3.4M in cash (against $436k in debt) after factoring the recent $3.9M (gross) financing at

$0.15/sh. We anticipate the company will have enough cash to hit our EBITDA positive target of

end FY17.

- We also estimate the company’s outstanding in-the-money options and warrants outstanding,

could yield (if exercised) $2.9M in gross cash contributions and 19M to shares outstanding.

- While the company does not have a backlog per se, we note that based on its existing customer

base, it has the potential to deploy another ~$30M worth of solutions (i.e. unaddressed assets).

- The company currently has ~$2.4M in unrecognized income tax deductions and credits. Capex

is relatively light at ~$10 – 15k per quarter.

- From a geographic perspective, ~75% of sales are derived from the US, 20% from Canada and

the remainder from outside North America.

Initiating With a Spec. Buy and $0.40 Target Price


- As an early stage fast growing entity, we feel a DCF analysis is appropriate to derive our target

price.

- Based on a 10-year revenue CAGR of ~40%, EBIT margins capped at 20%, a discount rate of

13% and terminal growth of 8%, we derive a $0.40/sh target.

- Our target price is equivalent to applying a ~5x EV/Sales multiple to our FY17e estimate of $7M,

which we feel is fair given our significant revenue growth forecast.

- Ultimately, we believe Memex is on the cusp of capitalizing on a massive and largely

underpenetrated market opportunity. As the company continues to gain traction, we believe it

could ultimately find itself a takeout target (possibly by an IT services group or machine

manufacturer like Mazak).

- We are launching coverage with a Speculative Buy rating and $0.40/sh target price.

Risks to Our Analysis


Lumpy revenues – Despite our projected strong revenue growth profile, we would remind investors

that this is an inherently lumpy business given the lack of material recurring revenues and long sales

cycles. That said, we believe the company’s backlog of potential business within existing customer,

along with its growing base of recurring maintenance revenues could help to offset this lumpiness.

We also believe that the company is working on new services (e.g. remote data monitoring), which

could ultimately translate into more recurring, SaaS-type revenues.

Competition – While the machine monitoring market is still at a relatively early stage of adoption,

there are a number of competitors vying for market share including the likes of ShopVue,

Shoplogix, Forcam, and 5ME. That said, we believe the market is large enough to support several

vendors. Furthermore, we believe Memex’s full solution suite and its strong portfolio of existing

customers represent key competitive differentiators.

Lack of profitable operations – The company is currently not profitable, although it does have ~$3M

in cash thanks to its recent equity offering (and before factoring in-the-money options and

warrants). Based on our current growth projections, we anticipate the company will hit EBITDA

positive results during our forecast period without the need for another financing. However, slower-

than-expected growth could create potential balance sheet issues.

Seasoned Team With Strong Tech Experience


David McPhail, President & CEO, has been involved with the company and its predecessors since 2008.

Mr. McPhail was previously VP Operations for Process Systems Integration, a factory automation services

company from September 2004 to December 2007 where he was a founding partner.

Dave Edstrom, CTO, was recently President and Chairman of the Board of the MTConnect Institute, where

he was instrumental in the creation of the MTConnect Standard. Mr. Edstrom has spent 35+ years in the

computer industry, 23 pf which with Sun Microsystems (last role: CTO Global Software).

Ed Crymble, CFO, has experience in senior management positions with two multi-national companies that

traded on the Toronto Stock Exchange. He has provided accounting, income tax and business

development advice to small and medium-sized businesses for more than 10 years.

John Rattray, VP Sales & Marketing, Mr. Rattray has 30 years of sales and marketing experience in the

Information Technology sector with the leading enterprise ERP companies (SAP, Oracle), and a number of

start-up companies and new product launches. He is a founder of Soft Services Sales Inc. a technology

distributorship focused on the manufacturing sector.

Rick Mosca, COO, was recently VP Consulting Services at Mind Over Machines. He has over 25 years of

experience in the software products and services industries. Mr. Mosca has held VP Application

Engineering positions at T. Rowe Price and UPS.

Board of Directors


Peter Lackey, Executive Chairman, Cervus Equipment Corporation

Robert Chafee, Chairman, Tonolli Canada Inc.

Richard Morley, Technology entrepeneur

Joe Brennan, Partner, Shea Nerland Calnan LLP

Scott Kaplanis, Partner & Portfolio Manager, Epic Capital Management Inc.

David McPhail, Founder, President & CEO Memex Automation

Edward Crymble, CFO, Memex Automation

Capital Structure


Description

Basic Shares Outstanding 96,269,177

Warrants 27,182,248 (Exercise price between $0.10 - 0.25)

Options 4,803,697 (Exercise price between $0.10 - 0.20)

Fully Diluted Shares Outstanding (ignoring strike price) 128,255,122

Memex - Capital Structure

Source: Company filings, Beacon Securities

July 14, 2015 |Page 2 Gabriel Leung| 416.507.3963 | [email protected]

theScore, Inc. Astrix Networks Inc.

FY13 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 FY15 FY16 FY17

31-Dec-14 31-Mar-15 30-Jun-15 30-Sep-15

Revenue:

Hardware, software, installation and support 689,953 936,646 501,178 401,749 353,144 513,923 1,769,994 3,522,057 7,044,114

Growth q/q 143.8% -19.8% -12.1% 45.5%

Growth y/y 35.8% 219.0% 1.1% 100.0% 150.0% 89.0% 99.0% 100.0%

Government and other grants 225,146 21,693 39,368 89,100 0 0 128,468 0 0

Growth q/q #DIV/0! 126.3% -100.0% #DIV/0!

Growth y/y -90.4% 163.0% 1225.3% #DIV/0! #DIV/0! 492.2% -100.0% #DIV/0!

Total revenue 915,099 958,339 540,546 490,849 353,144 513,923 1,898,462 3,522,057 7,044,114

Growth q/q 163.0% -9.2% -28.1% 45.5%

Growth y/y 4.7% 214.1% 21.5% 100.0% 150.0% 98.1% 85.5% 100.0%

Total cost of sales 98,491 288,947 206,551 173,966 123,600 179,873 683,990 1,232,720 2,324,557

Gross profit 816,608 669,392 333,995 316,883 229,544 334,050 1,214,471 2,289,337 4,719,556

Gross margins 89.2% 69.8% 61.8% 64.6% 65.0% 65.0% 64.0% 65.0% 67.0%

Operating expenses:

Development 497,912 1,021,205 182,852 198,485 250,000 250,000 881,337 1,300,000 1,520,000

Selling and marketing 400,485 728,692 310,082 350,705 400,000 400,000 1,460,787 1,840,000 2,100,000

Administration 237,599 680,312 294,665 286,157 300,000 300,000 1,180,822 1,300,000 1,400,000

Gain on foreign exchange -3,894 -21,500 -9,110 -25,133 0 0 -34,243 0 0

Total operating expenses 1,132,102 2,408,709 778,489 810,214 950,000 950,000 3,488,703 4,440,000 5,020,000

Operating income -315,494 -1,739,317 -444,494 -493,331 -720,456 -615,950 -2,274,232 -2,150,663 -300,444

Operating margins -34.5% -181.5% -82.2% -100.5% -204.0% -119.9% -119.8% -61.1% -4.3%

EBITDA -290,985 -1,478,897 -407,161 -443,311 -670,436 -565,930 -2,086,839 -1,950,583 -100,364

EBITDA margins -31.8% -154.3% -75.3% -90.3% -189.8% -110.1% -109.9% -55.4% -1.4%

Interest and accretion -92,853 -182,639 -16,212 -18,338 0 0 -34,550 0 0

Public listing expense -104,900 -131,327 0 0 0 0 0 0 0

Pre-tax income -513,247 -2,053,283 -460,706 -511,669 -720,456 -615,950 -2,308,782 -2,150,663 -300,444

Taxes 0 0 0 0 0 0 0 0 0

Tax rate 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Net income -513,247 -2,053,283 -460,706 -511,669 -720,456 -615,950 -2,308,782 -2,150,663 -300,444

Net margins -56.1% -214.3% -85.2% -104.2% -204.0% -119.9% -121.6% -61.1% -4.3%

EPS :

Basic -0.01 -0.04 -0.01 -0.01 -0.01 -0.01 -0.03 -0.02 0.00

FD -0.01 -0.04 -0.01 -0.01 -0.01 -0.01 -0.03 -0.02 0.00

Shares outstanding:

Basic 35,367,200 51,702,440 67,559,239 69,871,722 79,025,555 96,269,177 78,181,423 96,269,177 96,269,177

FD 35,367,200 51,702,440 67,559,239 69,871,722 79,025,555 96,269,177 78,181,423 96,269,177 96,269,177

Astrix Networks - Income Statement (C$)


July 14, 2015 |Page 3 Gabriel Leung| 416.507.3963 | [email protected]

theScore, Inc. Astrix Networks Inc.

FY13 FY14 Q1 FY15 Q2 FY15

31-Dec-14 31-Mar-15

Assets:

Current assets:

Cash 3,719 1,357,121 1,051,281 481,934

Cash in trust 116,825

Trade and other receivables 40,478 443,849 406,297 596,047

Inventory 60,013 111,124 68,624 67,949

Income tax recoverable 153,400 0

Prepaid expenses 40,995 38,258 36,468 34,919

Total current assets 415,430 1,950,352 1,562,670 1,180,849

Property and equipment 60,553 88,498 115,885 117,440

Intangible assets 515,066 418,785 406,364 399,266

Total assets 991,049 2,457,635 2,084,919 1,697,555

Liabilities:

Current liabilities:

Accounts payable and accrued liabilities 369,554 227,189 210,061 232,055

Unearned revenue 21,340 452,851 232,279 326,517

Payable to related parties 315,756 0

Current portion of long-term debt 72,000 96,000 96,000 96,000

Total current liabilities 778,650 776,040 538,340 654,572

BDC term loan 328,000 232,000 208,000 184,000

Provision 18,900 149,000 152,200 155,500

Payable to shareholders 735,607 156,294 156,294 156,294

Total liabilities 1,861,157 1,313,334 1,054,834 1,150,366

Shareholders' equity:

Capital stock 50,600 2,802,110 3,075,876 3,083,505

Shares to be issued 116,825

Warrants 621,996 676,333 673,704

Stock-based compensation reserve 231,698 246,085 269,095

Contributed surplus 579,313 583,313 584,076

Deficit -1,037,533 -3,090,816 -3,551,522 -4,063,191

Total shareholders' equity -870,108 1,144,301 1,030,085 547,189

Total liabilities and shareholders' equity 991,049 2,457,635 2,084,919 1,697,555

Astrix Networks - Balance Sheet


Beacon Securities Ltd.| 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H1 |416.643.3830|www.beaconsecurities.ca

Disclosure Requirements

Does Beacon, or its affiliates or analysts collectively, beneficially own 1% or more of any class of the issuer's equity securities? Yes No

Does the analyst who prepared this research report have a position, either long or short, in any of the issuer’s securities? Yes No

Does Beacon Securities beneficially own more than 1% of equity securities of the issuer? Yes No

Has any director, partner, or officer of Beacon Securities, or the analyst involved in the preparation of the research report, received remuneration for

any services provided to the securities issuer during the preceding 12 months?

Yes No

Has Beacon Securities performed investment banking services in the past 12 months and received compensation for investment banking services for

this issuer in the past 12 months? Yes No

Was the analyst who prepared this research report compensated from revenues generated solely by the Beacon Securities Investment Banking

Department? Yes No

Does any director, officer, or employee of Beacon Securities serve as a director, officer, or in any advisory capacity to the issuer? Yes No

Are there any material conflicts of interest with Beacon Securities or the analyst who prepared the report and the issuer? Yes No

Is Beacon Securities a market maker in the equity of the issuer? Yes No

Has the analyst visited the head office of the issuer and viewed its operations in a limited context? Yes No

Did the issuer pay for or reimburse the analyst for the travel expenses? Yes No

All information contained herein has been collected and compiled by Beacon Securities Limited, an independently owned and operated member of

the IIROC. All facts and statistical data have been obtained or ascertained from sources, which we believe to be reliable, but are not warranted as

accurate or complete.

All projections and estimates are the expressed opinion of Beacon Securities Limited, and are subject to change without notice. Beacon Securities

Limited takes no responsibility for any errors or omissions contained herein, and accepts no legal responsibility from any losses resulting from investment

decisions based on the content of this report.

This report is provided for informational purposes only and does not constitute an offer or solicitation to buy or sell securities discussed herein. Based on

their volatility, income structure, or eligibility for sale, the securities mentioned herein may not be suitable or available for all investors in all countries.

As at June 30, 2015 #Stocks Distribution

Buy 50 65.7% Buy Total 12-month return expected to be > 15%

Speculative Buy 14 20.9% Speculative Buy Potential 12-month return is high (>15%) but given elevated risk, investment could result in a material loss

Hold 3 4.5% Hold Total 12-month return is expected to be between 0% and 15%

Sell 0 0.0% Sell Total 12-month return is expected to be negative

Under Review 5 9.0% Under Review Currently undergoing a change of analyst coverage

Total 72 100.0%

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Analyst Certification

The Beacon Securities Analyst named on the report hereby certifies that the recommendations and/or opinions expressed herein accurately

reflect such research analyst’s personal views about the company and securities that are the subject of the report; or any other companies

mentioned in the report that are also covered by the named analyst. In addition, no part of the research analyst’s compensation is, or will

be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report.

http://www.beaconsecurities.ca/

spec. buy $0.40 initiating coverage - beacon securities · 2017. 2. 25. · merlin oee machine...

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