If you have been following this blog for some time, you probably heard about Ackroo Inc. (TSX Venture: AKR) before. For those who didn’t, we’ll save you some time and copy paste their “About Ackroo” section:
Ackroo provides gift card and loyalty processing solutions to help retail and hospitality merchants of all sizes attract, retain and grow their customers and their revenues. Through a software-as-a-service-based business model Ackroo provides an in-store and on-line automated solution to help merchants process gift card and loyalty transactions at the point-of-sale, provide key administrative and marketing data, and to allow customers to access and manage their gift card and loyalty accounts. Ackroo also provides important marketing services to assist its merchants with utilizing Ackroo’s technology solution.
AKR has been one of the worst performing stocks in our portfolio, except for a short period of time from January to May 2015. The company never made a penny in profits and kept diluting shareholders, so why do we still care? Because this trend is about to change big time in 2018 thanks to the transformational acquisition of LoyalMark, a family business providing gift card and loyalty processing solutions to businesses of all sizes – much like Ackroo.
For two cash payments of $100,000 and 35,800,000 shares, Ackroo acquired all of LoyalMark’s assets including their technology platform and $1,800,000 in high-margin highly-recurring (90%) revenue. According to management, in its last fiscal year LoyalMark’s EBITDA was a little under $90,000. Ackroo acquired over 1,200 locations in Canada and another 1,200 locations in the US to which they can now upsell additional products and services. Steve Levely (CEO) expects revenue from LoyalMark to break $2M next year and he has an aggressive cost-cutting plan to increase EBITDA by roughly $750,000 annually.
Remember, LoyalMark is a family-run business. Generally, within the confines of the law, family-run businesses tend to inflate expenses to reduce taxable income. Public companies obey to different imperatives. They need to produce positive and growing cash flows to create value for shareholders. We asked Steve how he will achieve his cost-cutting goals and here’s what he shared with us:
HR Costs – $500,000 (reduced staffing because of operational and administrative overlaps)
Operating Expenses – $250,000 (rent, utilities, internet, various business expenses like corporate travel, platform hosting costs, CRM, Legal, Tax/accounting, etc.)
When Ackroo announced the signing of a definitive agreement to acquire LoyalMark, the company also provided some guidance for 2018: The combined business will support over 4,000 locations and is projected to generate approximately $5,000,000 in revenue and between $700,000 and $900,000 in positive EBITDA in 2018 alone.
As you can see, most of the EBITDA projection if not all comes from LoyalMark alone. Ackroo’s business pre-acquisition doesn’t need to contribute much to reach those numbers. Given that they reduced the burn to less than $5,000 per month in Q3 2017, and that management is guiding for a little over 10% organic growth in 2018, it seems highly likely that the company should reach or exceed its guidance this time.
The transaction is transformational is so many ways:
- It adds a third key vertical in petroleum retailers on top of automotive dealerships (>300 locations) and hospitality (>750 locations). According to the press release dated December 8, 2017, LoyalMark’s acquisition added over 750 quick lube and gas retailers and as a combined business, they now support over 850 locations in that vertical. Additionally, Steve Levely told us that the transaction added 25 prospects in the sales pipeline, bringing the total to over 80 opportunities with many SMBs and some larger brands too.
- Ackroo now has a real US presence to leverage in order to continue its geographical expansion. Mike Sorbara, LoyalMark’s CEO, is based in Florida and will continue to work for Ackroo on a 5-year employment contract. He is an engineer by trade and will help assist in product development and sales by leveraging the network he built over the last 15 years. It is interesting to note that the Sorbara family also has an interest in BNA Smart Payments, which provides payment solutions for auto dealers, high-volume retailers and hard-to-place accounts like medicinal marijuana, adult content, gaming sites, dating sites, tobacco and synthetic drugs.
- The company acquired technology and talent to further advance and differentiate the Ackroo Anywhere platform (AKR3). LoyalMark’s platform has POS integrations with Bulloch (gas stations), AJB (middleware into many enterprise POS systems) and Maitre’D (hospitality), which is owned by Posera Ltd (TSX: PAY). AKR3 is already integrated with Posera’s SecureTablePay pay-at-the-table solution and we expect this will bring them many more hospitality opportunities in Canada and the US.
- By almost doubling revenue and becoming cash flow positive, Ackroo finally reaches the scale to attract SaaS venture capital (ex: SaaS Capital) and/or more traditional debt like the BDC. Future acquisitions will be finance through a combination of cash on hand and debt instruments unless management finds another transformative acquisition like LoyalMark which would warrant another shares issuance. More importantly, as it improves their financial position through 2018, the company will be able to attract larger clients who were hesitant to do business with a money-losing microcap company with a weak balance sheet.
As transformational as this transaction is, it isn’t what makes us the most excited about Ackroo in 2018. Gift cards, loyalty and rewards is a very competitive space in Canada and in the US. There are many players and they all compete on product features, integrations and price. Many of Ackroo’s competitors have been in business for 10-15 years (ex: LoyalMark was founded in 2001) and their technology platform plus operational model have scalability issues.
The Ackroo Anywhere platform, launched in 2013, is a simple-to-use self-serve platform for SMB merchants, yet it now offers powerful features on a module-to-module basis to better serve the needs of large enterprise clients: e-commerce and mobile offerings, marketing automation capabilities and business intelligence tools. We believe Ackroo can develop into a Big Data play that will help brands bridge the gap between their online e-commerce presence and physical locations using technology to automate marketing activities and data to drive better marketing decisions.
For instance, the recently announced 101 locations restaurant franchise win in the US was purely a product win. Ackroo matched its competitor’s pricing and stole the account. We expect to see more announcements like this in 2018 as Ackroo continues to get ahead of the competition from a product perspective.
Finally, management thinks they could do as much as $3M in EBITDA if revenue doubles to $10M in the next few years. Their operating model shows high potential leverage in our opinion. As investors, we like to invest at such inflection points where each additional dollar of revenue has a higher marginal contribution to the bottom line.
Capital Structure and Valuation
Share price: $0.11 (as of January 4, 2017)
Shares outstanding / Fully diluted: 75.49M / 91.65M
Market Capitalization: $8.30M
Long Term Debt: $0.62M including second $100K payment for LoyalMark
Enterprise Value: $8.92M
Insider Ownership: 51% including 47% owned by the Sorbara family
If we account for the 10.68M five-year warrants still outstanding at $0.10, whose exercise would roughly cover LT debt and working capital needs, the company’s Enterprise Value is $9.48M so capital markets are currently valuing Ackroo at just a little less than 2 times 2018 expected revenue.
For a SaaS company expected to grow revenue organically at 15-20% per annum in the next few years, with 75% gross margins, over 60% recurring revenue and a 95% customer retention rate, we believe this is quite cheap. Even more if we consider that they could do 1 or 2 small tuck-in acquisitions per year financed mostly with cash on hand and debt. We see a clear path to $10M in revenue and a 4x EV/Revenue multiple as management executes and financial risks lessen, which should slowly take the stock up to $0.40+.
The main risk to our investment thesis is dilution. Subpar financial performance combined with a weak balance sheet could force the company to issue shares again at undervalued levels, like it happened in July 2017.
Full disclosure: Philippe and Mathieu participated in the July 2017 private placement and own a sizeable position in AKR shares and warrants.