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:

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.