We understand that investors flee stocks when systematic risk prevails, and the current market meltdown has spared few microcap stocks. Kraken Robotics (TSXV:PNG, OTC: KRKNF), a Sophic Capital client, was no exception. But in our Microcap Investing in a Crisis report we detailed how microcaps (especially those with strong balance sheets) typically outperform large-, mid-, and small-cap stocks after bear markets end.
Coming into this bear market, Kraken’s management announced steady contract wins over the past 13 months:
- Jan. 23/20 8-year framework agreement signed with international defense contractor
- Jan. 20/20 Finalize OceanVision contract with Ocean Supercluster & industry partners ($18.8 million over 3 years)
- Jan. 6/20 Awarded $0.5 million SeaVision® contract from Government of Canada
- Nov. 27/19 Supply $2 million/year of thrusters to leader in robotic net cleaners for the aquaculture industry
- Nov. 26/19 Record quarterly revenue of $7.8 million and positive EBITDA
- Nov. 18/19 Strategic investor Ocean Infinity achieves significant milestones with Kraken batteries
- Oct. 2/29 Notified of successful bid on international mine hunting upgrade program
- Sept. 24/19 Establish Robotics-as-a-Service joint venture
- Sept. 23/19 Awarded $2.9 Million KATFISH contract from ThayerMahan
- Aug. 29/19 Awarded $2 million deep sea battery contract to a military customer
- Aug. 13/19 ThunderFish® 300 vehicle delivered to Defense Research and Development Canada
- Aug. 2/19 $1.8 million project funding to develop mooring chain laser inspection sensor
- June 17/19 $0.9 million U.S. Navy Contract
- June 13/19 $2.1 million KATFISH contract from ThayerMahan
- Apr. 17/19 $1 million funding contribution to support initial phase of OceanVision™ project
- Mar. 25/19 $1 million contract for ThunderFish® robot from Government of Canada
- Mar. 22/19 Part of winning consortium for Belgium & Dutch Navy mine hunting program (~$30 million)
- Mar. 5/19 Receive $2.3 million from exercise of warrants by Ocean Infinity
- Feb. 19/19 $1.7 million of purchase orders from Ocean Infinity
Look into the Abyss and See the Kraken Rising
You may think that Kraken’s management was able to execute while the market was ripping higher may come to an end. However, we believe management will continue to execute regardless of whether the markets are good or bad. Even during the recent market volatility, Kraken announced $2.8 million of contracts. Beyond that, Kraken has a robust $300 million pipeline of military and commercial prospects that has caught the attention of investors on both sides of the U.S. / Canada border. Included are some international military contracts that should (you never know with government) be awarded this year.
Evolving into A Data Play
Kraken has a real business that continues to evolve. The next stage of growth evolving from its current portfolio of sensors and robotics is robotics-as-a-service (“RaaS”). Under RaaS, Kraken would lease robotics and collect data for clients (likely commercial clients for things such as inspecting undersea cables, pipelines, and oil platforms). With RaaS, Kraken would collect fees for robot deployments while collecting valuable underwater data (mapping, materials degradation) that could be monetized.
Kraken’s $18.8 million of Ocean Supercluster funding means RaaS underway. The funding allows Kraken and its partners to develop new technologies and provide high resolution seafloor imaging and mapping covering more than 5,000 square kilometers around Atlantic Canada. Kraken and its partners will leverage key enabling technologies (unmanned maritime vehicles, advanced sensors, robotics, autonomous systems, big data machine learning and predictive analytics) to deploy innovative technology platforms across ocean sectors and extend the global reach and market opportunities for Kraken and our partners.
Management’s Interests Aligned with Investor Interests
Until then, management and insiders remain highly incentivized to maximize shareholder value (they own over 30% of the Company). Strategic investor/customer Ocean Infinity owns over 15% of the Company. Vice Admiral Michael J. Connor (retired), who was the Commander of the United States Submarine Forces, is a Board Director and well connected to allied militaries.
Remember That Microcaps with Strong Balance Sheets Outperform
Any company with a strong balance sheet can weather periods of market volatility – even microcaps. And our Microcap Investing in a Crisis report shows that microcaps perform when bear markets end. We believe Kraken is strongly positioned for when current market turmoil settles. At the end of September 30, 2019, the Company had:
- working capital of $7.7 million (including $2.7 million of cash) compared to $4.9 million at December 31, 2018;
- $560K total debt, with $200K current;
- Adjusted EBITDA was $1 million, and;
- Nine-month cash flow from operations before non-cash working capital changes was $1.9 million.