I did not anticipate writing reviews on three consecutive days. I was caught a little off guard by iFabric’s release of their Q2 financials after hours last night. Perhaps I shouldn’t have been, as their deadline was tomorrow. While it can be somewhat mentally draining to go back to back to back, it helps when you can write about two of your better performing recent picks on successive days. That, and coffee!
A Quantum Leap (not the terrible TV show) is a sudden, dramatic change, or a very large step forward. Early in my career I had an Executive Vice President who used to refer to this term quite often. Revenues that consistently increase in the mid single digits period over period are commendable. Quantum Leap improvement is where your business transforms into something entirely different overnight and delivers significant improvements within the metrics of the business.
This is where iFabric is today.
In mid December, the company was one of my annual Wolf Picks when it traded at $1.50. As of yesterday’s close of $5.21, that’s an increase of nearly 3.5x or 247% in the eight months since.
You could have had IFA at $1.50 all the way back in the summer of 2023. It’s been a long time since I wrote about the anatomy of a Wolf Pick back in 2024 referring to my selection of Kraken Robotics at $0.59, but the rationale for selecting the stock as an annual pick is similar. In the piece, I talk about striking when the iron is hot.
Back in the middle of June of 2024, I gave iFabric a decent review but felt they were priced appropriately and weren’t yet worthy of any of my investing dollars. They traded at $1.25 during that June ‘24 review. Eighteen months later, and a week before they became a top pick, it traded in that same $1.25 range.
The chart above is the main reason why. Now iFabric has performed very admirably since 2023 growing at a compounded growth rate of about 18%. But 2026 is poised to DOUBLE, or more. This is their Quantum Leap year, IMHO of course.
The company raised a lot of eyebrows with their record smashing Q1 which saw revenues increase by 288% and net income by over 4000%. That $27.5M in revenue from Q1 was 84% of the revenue they generated in their entire previous year. The stock price is up 75% in the three months since.
With great results, come higher expectations of course. In this what have you done for me lately world we live in, what has iFabric have for an encore in Q2? Let’s find out.
Balance Sheet:
iFabric’s balance sheet changed dramatically since their last quarter, thanks to a $28M bought deal less than a month after their financials were released. The company received $23M in gross proceeds while the top two insiders sold 1.35M shares for another $5M to institutional buyers.
Their new look balance sheet therefore looks much stronger than the one I referred to as weak, liquidity wise three months ago. They now have a current ratio of 4.2 (1.8 last quarter) which consists of $25.5M in cash, $11M in receivables, $16.9M worth of inventory and $1.3M in other short term assets against $13.1M in liability commitments due over the next year.
That A/R number was cut by 58% in the quarter which will dramatically impact their cash flow in a positive way, and inventory numbers are consistent with Q1.
iFabric has $5.1M of debt, all listed as current. $1.5M through their operating LOC and $3.6M in a payable on demand loan at 5.25%. While listed as current, the loan is amortized over 25 years and doesn’t mature until March 2029. Management expects to pay the minimum monthly payments of $22k over the next 12 months so “current” is just an accounting technicality.
Cash Flow:
Due to their record revenue quarter, A/R ballooned as expected and this had a very negative impact on their Q1 operational cash flow (OCF), burning $4.7M in the quarter.
In my Q1 review I pointed to selling to reputable retailers and excellent historical A/R management and predicted a reversal of fortune for the next couple of quarters cash flow.
In just one quarter, the company generated $10.5M of OCF bringing them back in the green for the year at $5.8M through six months.
A lot of activity in the financing section. $21M net proceeds from their capital raise and debt reduction of $5.1M.
After zero investments YTD, the company’s cash position has increased from $3.8M to $25.5. Liquidity is no longer a concern here.
Share Capital:
36.5M shares outstanding, with 20% dilution over the past year, all occurring in Q2 as part of their capital raise
1.8M options outstanding, all ITM. Surprisingly, 100k went unexercised in the period at $2.40
Zero warrants with all 2.9M outstanding last year, expiring unexercised.
Insider ownership now sits at 50%, down considerably with the private sale at the time of their raise
Income Statement:
It’s not anywhere close to the $28M quarter from Q1, but revenues did jump by 65% over last year to $9.6M. Gross margins were off significantly to the tune of over 700 basis points to 29.5%. Therefore gross profit dollars only increased by 33% on 65% more revenue.
I would like a word with whomever is responsible for the MD&A commentary. It states. “the 7% decrease in gross margin is primarily due the product mix for the quarter, as well as marketing support of approximately $650,000 provided to retail customers to promote the sale of company’s products, which was deducted from revenues as required under IFRS.”
The reverse is actually factual however. The $650k in marketing support, I’m assuming to Walmart is the primary reason, with the product mix sold playing only a very minor part of the rationale. If you add back the $650k to margin their rate would be 36.6%, only off by about 40 basis points instead of 700.
I could go into a long rant about why I feel the IFRS rules are wrong here. I feel it should impact operating expenses under marketing expense, but the end result would be the same on the profitability line, so I’ll leave it at that.
Total expenses were down 2%, but it would be disingenuous to lead you to believe they had a great operational leverage quarter. The company, like so many was impacted by tariffs, and they received $925k back in the quarter as part of the court settlement.
Without that credit, operational expenses grew by 37%. Selling costs doubled and G&A expenses rose by 20%.
Tack on an additional $545k in taxes and their net earnings for the quarter came in at $240k, a $430k turnaround over their loss in the comparable quarter of $190k
On a YTD basis:
Revenues of $37.1M, up 188% over last year
Margin erosion of 600 basis points to 31.8%
Gross profit dollars up 141%
Operating expenses up 27%
Net income of $3.95M vs a loss of $100k despite a $1.7M additional tax burden
Summary:
Certainly a bit of a mixed quarter but iFabric is still operating at a very high level.
If the company didn’t sell another cent worth of merchandise for the rest of the year, they would still end the year up double digits in revenue - 11%.
iFabric’s expense structure was inevitably going to change to support this significant increase in revenue, and unfortunately the big retailers like Walmart, Costco, and now Target command a lot of leverage over smaller manufacturers in their pay to play arena, and that can be temporarily impactful to gross margins.
While Quantum Leaps are transformational, they are not necessarily linear. Therefore continue to expect to see some lumpiness in their results. Anyone expecting $25M quarters from here on out was not doing their due diligence. Q3 is likely to shape up very well once again on the revenue line as they introduced a new line of scrubs into Target early in the quarter.
Interestingly the company is not going to be holding an earnings call for another week. You can register for that here.
We are approximately 45 minutes into trading after these earnings and the market significantly punished the stock sending it down by nearly 20% in the first few minutes. I acted upon that, buying the dip at the $4.20 support level. It’s already rebounded by 8% to $4.55. If it gets back to $4.65 that upward trend line will remain intact.
By buying the dip, you can assume I’m still very much bullish in iFabric despite the pullback today. I’m also leaving my rating at 3.5 stars.
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 companies 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.