Thursday, November 21, 2013

Authentidate’s Market Opportunity: A Conversation with Company Management

Disclosure: Long ADAT. Please read our full disclaimer.  

Editor’s note: After noticing our last article on Authentidate, many of our readers contacted us seeking to learn more about the company.  With much thanks to ADAT management, we are pleased to present this interview.

Authentidate Holding Corp. (Nasdaq: ADAT) is a healthcare technology company with strength in telehealth (remote patient monitoring) and software solutions that replace time-intensive, paper-heavy processes.  We sat down recently with Ben Benjamin, Chief Executive Officer, and Gavin Stewart, Vice President of Business Development, to discuss the company’s market opportunity.

Below is our view of the takeaways from the conversation, followed by an abridged transcript.

Wednesday, November 20, 2013

LiqTech’s Emergence from Obscurity to Greatness

Disclosure: Long LIQT. Please read our full disclaimer.

Great investments don’t arrive at your front door, gift wrapped and topped with a red ribbon.  If there’s one thing we learned over all the years that we’ve been running our microcap fund, it’s that often the best opportunities can come from the most unusual of places.  

One of our peers asked us recently, “Do you really own millions of dollars worth of a Danish company that trades on the OTC”?  We sure do!  LiqTech International (OTCBB: LIQT) is not only a Danish company trading on the OTC, but it’s in the unfamiliar business of membrane filtration.  The company’s revolutionary silicon carbide technology is complex, but its utility is something everyone can relate to: clean air and water.  Nothing is more essential to life.  Not even Facebook.

Friday, November 15, 2013

Highlights from Authentidate’s November 2013 Earnings Call

Disclosure: Long ADAT. Please read our full disclaimer. 

Authentidate (NASDAQ: ADAT) continues to be a core holding of ours.  For those new to the story, the company has a suite of software solutions that help healthcare organizations manage patient care.  The company’s technology both improves patient outcomes and slashes the cost of care, so we view it as a win for all parties involved.

Yesterday the company reported its financial results for the quarter ending September 30, 2013.  Revenues were up 96% to a record high, margins improved, and the operating loss declined.  On the company’s last earnings call in September, Authentidate’s CFO Bill Marshall stated in response to a question about future results, “The stock answer is we don’t give guidance, but as Ben said, the numbers will be better, much better.”  These guys delivered yesterday.  Management was very upbeat on the call and expressed an optimistic outlook. 

We thank all our readers who told us how much they appreciated the conference call summary we published on Authentidate’s prior quarter.  We are pleased to share some highlights once again.

Monday, November 11, 2013

The Cure for Low Prices

Disclosure: Long URG. Please read our full disclaimer

“The cure for low prices is low prices,” they say. Such is the argument behind Roth Capital Partners’ suggestion today that uranium prices may benefit from the recent announcement out of Kazakhstan.  
"Kazakhstan announced last week that it will halt all growth projects for uranium production going forward. This appears to be simply due to a continued low uranium price environment and could be the catalyst needed to begin to drive spot prices higher."  (Roth, 11/11/13)
Kazakhstan is the world’s largest producer of uranium at about 30% of global supply.  The long term impact of this announcement on spot pricing is not immediately clear, but we’d venture to say that decreased supply will only support the bull case for uranium.  Roth is yet to revise their numbers higher as a result of this announcement, and currently estimates a 16.7% uptick in uranium spot in Q4 vs. Q3.

Legal Disclaimer      Twitter: @lazarusip

Friday, November 8, 2013

What's Going on at Authentidate?

Disclosure: Long ADAT. Please read our full disclaimer.

We are long term investors in Authentidate (Nasdaq: ADAT) and are one of the company’s largest shareholders.  It’s a healthcare technology company with strength in telehealth (remote patient monitoring) and a suite of software solutions that take manual, paper-heavy processes (eg discharge, referrals) and make them digital.  We think this is the future of healthcare—using technology to drive down costs by cutting errors and saving time. 

Our big takeaway from ADAT’s last conference call is that things are moving in the right direction.  Since they reported year-over-year top line growth of 51% the stock has been moving higher, up 14% so far.   Here are a few snippets from the call.

Authentidate's telehealth systems allow patients to be monitored from the comfort of their own homes

On the pipeline
“We continue to see increased interest in all products and services from potential customers and other interested parties. This is reflected in a number of RFP’s that we are currently involved in . . .”

On their competitive advantage
“ . . .there are not many products that are FDA approved and the bigger institutions . . . seek assurance through the FDA approval of devices. We are one of a few devices that are approved in the telehealth space and we think that gives us tremendous lead time advantage  . . .”

On their business model in telehealth
“We largely model our business off the recurring revenues, so we have taken the razor/razorblade model in the telehealth space.”

On M&A in their sector (Medtronic [NYSE: MDT] paid $200 million cash for a competitor)
“Recently there was a major acquisition in the telehealth space, we had Medtronic acquire Cardiocom and we expect to continue to see that type of activity simply because of the size of the market and the speed at which it’s moving. I don't think the bigger companies themselves are going to try to develop all their capabilities.”

On their sole-source opportunity for HIV patients at the VA
“. . . our company has started to enroll patients in the pilot program for the VA’s HIV patients. . . . After the pilot is completed, we expect that the HIV telehealth program will be made available for VA HIV patients nationwide. . . . for a recurring monthly subscription fee for each [patient]. . . ”

On the non-government side of the business
“Moving beyond our business with the federal government, we made progress in the private sector as well.  Our Inscrybe Hospital Discharge solution is starting to gain traction and we have a number of RFP’s outstanding for this solution. We expect several of them to finalize over the next few months or so . . .”

On the capital raise and Series C conversion
“These transactions have significantly strengthened our balance sheet . . .”

On the Department of Veterans Affairs, a key customer
“We feel very good about the relationship that developed between ourselves and the VA, and we think we will execute better as we go forward.”

On the growth opportunity with existing customers
“We only do about 10% of our existing base of customers’ transaction[s]. . . . We would expect that target rate to grow to about 70% to 80% . . .”

Transcript credit: You can read the full transcript of this call and many other earnings calls—for free—at

Wednesday, November 6, 2013

Building a Portfolio in Today’s Bull Market

Please read our full disclaimer.

Catching up on some reading today.  Saw this from Ben Levisohn of Barron’s.

Consider: Since the rally began, in March 2009, there has been the flash crash, the Greek default drama, the U.S. debt-ceiling debacle, the Standard & Poor's credit-rating downgrade of the U.S., the sequester, and the great taper scare. Each of these, we were told, could have ushered in a new bear market. Instead, the S&P 500 squirmed out of the traps and headed higher. And for its latest trick, the market had to avoid the double whammy of a government shutdown and a potential default. . . . Bull markets have a certain momentum to them and can brush off inconvenient things," says Richard Sylla, a financial historian at New York University.

We see both sides of the bull/bear debate.  We remain invested, but with our eyes wide open.  One lesson we learned as survivors of ’08: nothing is truly uncorrelated.  That said, we like our focus on microcaps which tend to be more idiosyncratic and like our healthy positions in all-weather companies, such as a producing resource that has both significant upside potential but also the defensiveness that comes with hard asset value.   

Despite the bulls’ momentum, riding it is not appealing to us since you never know when you’ll have the rug pulled out from right under you (today’s example: TSLA).  We’re constantly, constantly looking for more all-weather companies to add to the portfolio.

Legal Disclaimer              Twitter: @lazarusip

Monday, November 4, 2013

Will 1-800-Flowers Yet Bloom?

Disclosure: No position in FLWS. Please read our full disclaimer.
We met recently with management from 1-800-FLOWERS (Nasdaq: FLWS).  Special thanks to our friends at Brean Capital for arranging the meeting.

FLWS has $738 million in trailing twelve month revenue and a market cap around $330 million.  We are favorably disposed to online category leaders, appreciate the strength of the company’s brands, and saw the stock sink to around $5 a share after breaking $7 this summer so were happy to meet with the company and learn more.

From 1800flowers’ Halloween collection

Photo Source:

The business has three segments: consumer floral (56% of sales), BloomNet (a wire service that competes with FTD and Teleflora, 11% of sales), and gourmet foods and gift baskets (33% of sales).  Jim McCann is Chairman and CEO, after founding the company over 35 years ago.

Revenue growth is there, although it’s rather modest.  Over the past three fiscal years it has averaged 4.5% annually.  The September quarter was just under 3%.  Growth is coming from mobile, e-commerce, new product categories, BloomNet, and the gift basket side of the business. The consumer floral segment is more challenged. Historically the company has acquired gift basket properties at 5-7x EBITDA, but FLWS has also created de novo brands when they saw an opening in the market and nothing to buy.  Long term, the company is targeting a mid single digit growth rate on the top line.  That seems feasible, even conservative to us, if they do the job right.

One of the key things we wanted to hear about was the opportunity for margin improvement.  With gross margins historically around 40%, operating margins in recent quarters look lighter than we would expect.  The company explained that sales and marketing, brand support, and call center operations are all expensive.  After falling from 5.2% to 4.6% FY2009 to FY2010, adjusted EBITDA margins have been on the mend, jumping to 6.0% in FY2011 and then expanding 30 basis points in FY2012 and again in FY2013.  Management’s long term goal is to get to a double digit EBITDA rate.  If we dig further into FLWS, we’ll start here: how likely margin expansion is and how long it will take.

The balance sheet has strengthened over the past few years, with $130 million of debt paid down since FY2008.  At September 29, 2013 FLWS reported $71 million in current maturities of long term debt and $4 million in cash, but there’s some important commentary here.  Management explained that the $71 million went to build inventory ahead of the holiday season and is expected to be paid off by December.  The company still has about $130 million of availability from their credit line, which will revert to $200 million once the $71 million is paid down.    Plus, the company is making money—they are guiding to be free cash flow positive this year, to the tune of $20 million.

There aren’t many precedent transactions in the industry, but we heard that FTD and Proflowers changed hands at 10x EBITDA or above.  Benchmark Capital said their ecommerce group is averaging 10x EBITDA.  10x is several turns higher than where FLWS trades today, at roughly 7x trailing (and 5.5x CY2014 according to Benchmark’s estimates.)  Brean Capital is expecting over $50 million in EBITDA for the current FY2014, and over $55 million in FY2015.

Back of the envelope: if FLWS grows revenues by 10% in aggregate over the next couple of years, gets EBITDA margins to around 7%, and is awarded an 8x EBITDA multiple—an optimistic, yet plausible scenario— the stock should be north of $7 a share.  In a transaction, or if they hit the long term targets they are after, it can be dollars higher than that.  Heavy ownership by the McCann family does reduce the likelihood of an unsolicited offer or activist involvement, although it also means someone is minding the (flower!) store.  The growth profile and margin opportunity aren’t as obvious as we’d hope, but we still might do some more work on this one.

Legal Disclaimer     Twitter: @lazarusip

Friday, November 1, 2013

Our Favorite Uranium Stock

Disclosure: Long URG. Please read our full disclaimer.
Raymond James’ mining analyst David Sadowski argues in a recent interview that the significant global growth underway in nuclear power will push uranium prices higher in the medium to longer term.  Sadowski sees uranium prices rising annually for the next three years, essential doubling from today’s price to reach $70/lb by 2016.

Despite reactors coming on line all over the world—in China alone 30 are under construction and 59 more are being planned—uranium is a contrarian investment right now, with spot prices at eight-year lows.

Interior of UR-Energy’s facility
Photo courtesy of UR-Energy

One of Sadowski’s top two picks is a company we're also big fans of, UR-Energy (NYSE: URG). Here’s what he had to say about URG:

“We've got a strong buy rating and $1.80 target [vs. $1.05 today, so 71% higher]. Ur-Energy is the world's newest uranium producer, having just started operations at its flagship, wholly owned Lost Creek in-situ leach mine in Wyoming, a very favorable geopolitical jurisdiction for mining. Lost Creek has lowest-quartile cash costs. We're modeling it at about $22/lb life-of-mine average production cost there. Ur-Energy just put out a strong production update in September. We think that the ramp-up curve on production is highly derisked now. The company also boasts an operationally experienced management team that has done a great job hedging themselves. About 33–50% of design production rates are going to be delivered into fixed-price contracts through 2019. Those contracts are priced well above current market levels, providing significant near-term cash flow. Having just secured its long-sought-after low interest bond loan from the state of Wyoming, $34 million at 5.75% interest, we model Lost Creek as fully funded, and the company's balance sheet as carrying much lower risk. Furthermore, trading at only 0.6 times price-to-NAV, a 40% discount to the group average, we think the current share price offers a very attractive entry point at the moment.”
For the curious minded, Sadowski’s other top pick is Cameco (NYSE: CCJ – no position).  The full interview appears in The Mining Report, and is entitled, “Uranium Investors, Ignore the Noise! Fundamentals Are Compelling.”