Char Technologies released their Q2 at the beginning of the month. Over the next week the stock declined by 13%, but has gained all of that back and then some, gaining 25% from their recent low on June 10th.
This will be my initial look at the company via request from the Wolf Den discord. YES is a cleantech development and energy transition company, developing biocarbon and renewable energy solutions.
This $44M market cap company has been at it a while, trading on the Venture since 2014, and well off of their five year high of $1.03 back in November of 2021, 71% lower.
An initial look at their financials tells me the due diligence story had better be good as the company has lost $1.82 for every $1 in revenue they have earned this year and are trading at nearly 16x their TTM revenue.
Let’s don my Simon Cowell hat and determine whether Char Technologies will be a yes, or a no from me.
(Free release scheduled for July 1)
Balance Sheet:
The balance sheet is mediocre at best with a current ratio of 1.06 that consists of just $782k in cash, $2.5M in accounts receivable and $292k in prepaids overtop of $3.38M in current liabilities. Not only is their overall balance sheet lackluster, but so is their liquidity with their combined cash plus A/R situation not meeting their 12 month liability commitments.
Their accounts receivables throw up an initial red flag for me.
The company has only done $1.3M in revenue in the last six months, yet their trade receivables are 152% of their YTD sales. When a company has receivables that show potential red flags and does not provide any type of aging report, it makes it look more concerning.
Worse yet is when you see loans being extended to their CEO and other related parties. This $340k loan was also done at a very attractive 2.45% interest rate. I did not bother to go back and find the origin of the loan, but as of September 2024, the balance was $307k suggesting no recent payments have been made. It’s also a payable on demand loan with no firm date. There is never any good reason for a microcap company trading publicly to utilize the treasury in this manner in this writers opinion.
Just prior to quarter end, and around the same time as their private placement, they loaned Bioveld $2.5M at 13.5% interest. Then post financials the company entered an agreement to add $3.5M (CAD) of debt at 12.5% with you may have guessed, Bioveld Canada. This was done to fund a pellet production facility out of Quebec for $1M USD. While this will overall improve the company’s liquidity situation, it’s bad business when you take on loans of 12.5% while giving out loans to your CEO at under 2.5%. That loan also came with potential future dilutive measures with 2M warrants being given at $0.35.
This all feels like something I do not want any part of.
Cash Flow:
Based on the above comments on their balance sheet and receivables, it’s no surprise to see that the company has burned through $2.06M of cash via operations through their first six months. This is however a 28% improvement over the $2.87M they burned at this stage last year.
As previously stated, they loaned their related part $2.25M and received $3.85 (net) from their March raise and another $900k from warrant exercises.
Overall their cash position has increased by 72% from the start of the year.
Share Capital:
As of March 31, 150.7M shares outstanding, 27% dilution over the past year and 49% over the past eighteen months
24.8M warrants outstanding, all just out of the money between 30 and 35 cents
8.5M options, 1.3M ITM
3.55M RSU’s and approx 1M SAR’s. I personally do not like RSU plans for companies that burn cash, and Char has never had a positive operational cash flow year since their first year trading in 2014
21% insider ownership, 7% held by Bioveld Canada
No transaction in the open market over the past year
Income Statement:
In the second quarter, Char delivered $700k in revenue, down 3.7% from the comparable quarter. Gross profit on the other hand was up by over 1700 basis points from 32.1% to 49.2%, therefore even on declining revenue, they still delivered 24% more gross profit dollars.
Total expenses came down dramatically by over 21% mainly through big decreases in professional fees (59%) and office expenses (43%). Despite those margin and operational expense improvements, the company still had a $1.32M operating loss.
YES has also taken a 16.5% book loss on their JV investment in Thorold LP. In total that investment is down 23% since entering into the joint venture. That below the line loss almost offsets the grant income received of $339k in the quarter. Overall their net loss was $1.36M, a slight 12% improvement over the $1.55M loss suffered last year.
YTD the metrics are as follows:
$1.3M in revenue, up 15% through six months
Gross margin of 48% compared to just 29.2% last year generating 90% more gross profit dollars.
$2.74M of operational expenses, 22% less than last year but over 4x their GP dollars.
Net losses of $2.38M vs $3.21M last year
Summary:
Overall, this looks very messy, and Wolf doesn’t do messy. Before we get to the messy stuff, let’s look at what would be a break even point for Char Technologies.
YTD they have delivered $1.3M in revenue. To break even on the same level of spending and with their current gross margin, they would have needed to have $4.88M in revenue or close to a $10M run rate.
Their recent acquisition of $1M in biocarbon assets is vague but suggests it could deliver 12,500 tonnes of biocarbon each year over five years. Estimates at the high end would deliver a total of $20M, or $4M per year. For that they would also have to provide royalties and the already mentioned 2M warrants. Even at the high end this deal would not get them anywhere near their current break even point, all the while burning over $1M in operational cash flow per quarter on a currently suspect balance sheet.
Then you get into the messy stuff in what appears to be a very incestuous relationship with Bioveld Canada with loans going both ways and involved in a joint venture which has lost 23% of it’s value in the first nine months. Then you get into all of the related party transactions. Secretarial services, consulting contracts and to top it off loans to the CEO at very attractive rates with no end date.
I’m getting Pyrogenesis vibes, and that isn’t a compliment. In the words of Simon Cowell, “it’s a no from me”. I could have dug in more, but I’m afraid of what I might have found.
To top it all off, it trades at very insane valuation metrics.
One star.
Disclaimer:
My intent is for my reviews to be a bolt on to due diligence that you have already completed. I receive dozens of review requests a week, therefore my own DD may be great or none whatsoever. Unless otherwise stated or implied, my opinions are on the financial performance of the company based on their most recent filings. I conduct these reviews to assist other retail investors whose research skills are limited when it comes to reviewing financial statements. I do not accept compensation of any kind from company’s I review.
Wolf FINS Reviews are intended to be informational and are based on personal opinion. They are not intended to be financial advice, and all readers are encouraged to perform their own due diligence prior to their investment decisions, including discussions with their investment advisor.