December 2019

By Scott Gardner

Given the recent strength of Torrent’s share price and an increase in queries about the Fund, it seems appropriate to provide some colour on our activities.

We are pleased to report Torrent Capital’s Net Asset Value (NAV) per share up +18.0% year-to-date period ending Q3 2019 and +86.6% since Torrent’s first quarterly reporting period of Q1 2017.  This compares to the S&P/TSX 60 Index that was up +16.1% and +9.1%, and the TSX Venture Composite that fell -2.3% and -34.5%, over the same time period.

While it is still early days for the Fund, we are confident that our mandate to hold a concentrated portfolio of small cap securities that are trading at a discount to their intrinsic value and/or growth prospects is a winning approach for our shareholders over the long term. We believe the Fund is well-positioned for growth moving forward and want to highlight some of the names that have been contributors to our performance thus far and also serve to highlight the types of opportunities we look for when allocating capital.

Kneat Solutions (KSI.V:$2.35) has been a strong performer, rising 123% year-to-date, as the company hits its stride after years of developing its Kneat Gx software platform. Kneat Gx is now used by some of the world’s leading life sciences companies, and we believe that the KSI is on the cusp of a rapid growth phase.

KSI’s client base is now comprised of nine Tier 1 biotech and pharmaceutical companies. In the past 18 months, KSI has signed a total of 12 customers, and its presence on manufacturing sites has grown from 15 locations to upwards of 450. The company has announced the addition of three world-leading life science companies in the past three months alone. Most recently, KSI announced it has signed a five-year master service agreement with another world leading biopharmaceutical company with 10k employees and operations in over 30 countries; further indication that the company is gaining momentum.

Kneat is unable to mention their clients by name; however, analysts have speculated that the growing roster could include the likes of Pfizer, GSK and Johnson and Johnson, among others. For a small cap software company to be supporting names of this pedigree, especially given the business-critical element of the Kneat Gx offering, is a huge vote of confidence for the company and its technology. As these underlying relationships become better known in the marketplace, we believe that it will fuel referrals and serve to significantly de-risk the Kneat Gx offering for those companies exploring its adoption.

These recent business wins are contributing to an impressive growth profile for KSI. Analysts from Mackie Research Capital and Echelon Wealth Partners have 2020 annual revenue growth estimates of 145% and 168%, respectfully. This compares to consensus estimates of 20% growth for US software companies and 15% for Canadian names over the same period. Should their clientele continue to scale across their total potential install base of 450+ sites, the company has indicated that this represents the potential for annual recurring revenue of ~C$40Mil over the next 5 years.  In our opinion, given the recent client wins, these projections could prove to be modest.

We view the initial adoption of Kneat Gx as the largest hurdle in the sales process and believe that the scaling of the product across an individual client’s operations could serve as an inflection point for the company.  It is worth underscoring that the aforementioned growth estimates are predominantly based on existing clients and do not factor in the optionality of further client adds, which we also view as likely given that the company can now leverage off the quality of their Tier 1 book of clients in its sales process. KSI’s recent beat on Q3 2019 revenue ($1.8Mil vs. $800K cons) provides further support to our view that revenue forecasts are threatened to the upside.

KSI currently trades at 12.X EV/Revenue versus Global Software/SaaS companies that trade at 7.5X.  Veeva (VEEV-US) and Aspen (AZPN-US), more relevant comps in our view given their focused businesses and growth numbers, trade at 15.3X and 14.1X, respectively. Considering KSI’s superior growth profile, its expanding roster of Tier 1 clients, the rigidity of its IP and barriers to entry, we believe that a premium multiple is well-supported. Look for industry leading revenue growth and additional high-profile client adds to propel the stock higher.

Martello Technologies (MTLO.V:$0.32) has been a boost to the Fund since it went public in September 2018. We remain very positive about the prospects of Martello.

Martello provides software and hardware solutions aimed at providing confidence in the performance of real-time services on cloud and enterprise networks. MTLO’s products include unified communications (UC) performance management software, IT systems visualization software and SD-WAN technology. The company has a stacked offering in that it aims to be involved in the analysis, monitoring and optimization of digital networks for the benefit of their enterprise clients. Given the mass migration to cloud based services, network management has become a critical component in the IT toolbox, and MTLO is well positioned within this powerful trend.

MTLO is an established technology company with a presence on over 7,000 networks, 16,000 devices and reaches more than 150 countries around the globe. MTLO’s underlying clients are comprised of numerous well-known global enterprises, including Volkswagen, the United Nations, Hilton Worldwide and Major League Baseball. In addition, MTLO currently has approximately 100 employees, an annual revenue run rate of $13.1Mil, and annual revenue growth of 59.3%.

Torrent believes that MTLO is on the verge of a rapid growth phase, driven by both organic growth and acquired expansion. MTLO’s performance management software is on thousands of networks, which is a competitive advantage for the company as it can view deficiencies on their enterprise client networks in real time. With this information, MTLO can then decide if it wants to build-out a solution internally or make a strategic acquisition to acquire a given technology to address the concern. As MTLO expands into different channels, potentially into artificial intelligence or cyber security, it will already have an established network of clients. This reduces the inherent risk of an early stage software company that typically spends a significant amount on product development before establishing a customer base.

We attended MTLO’s investor day in Toronto last week and were extremely encouraged by the company’s growth prospects and its competitive positioning in the UC marketplace. Management indicated that they have vetted countless acquisition targets, with heavy involvement by Co-Chairmen Terry Matthews and Bruce Linton, and have narrowed down their interest towards companies involved in AI, cybersecurity, Microsoft 365 and 5G. Any news on the acquisition front should help the stock, as the company has demonstrated via its acquisition of Elfiq Networks and Savision, that it can execute synergistic transactions.

The presentation strengthened our view that MTLO is a catalyst rich story, with upside coming from potential contract adds, improved pricing with key clients, cross selling into the Mitel Network and enhanced EBITDA margins. We also noticed the presence of numerous Bay Street analysts at the presentation, which suggests to us that coverage may be on the horizon.

MTLO trades at less than 2.5X Torrent’s FY2020 EV/Revenue forecasts of $20Mil, which is below the group average of 8-10X. This discount should narrow given the growth prospects of the unified communications sector, the quality of the executive team, ongoing news flow associated with M&A and strong revenue and earnings visibility for a small market cap technology company in Canada.

Ruckify Inc. (private) has been a strong performer for the Fund after we initiated a position in the company earlier this year via two private placements with an average cost of $1.07 per share. Ruckify closed an additional round of financing in September at $2.88 per share, representing a 169% return on our original investment.

The September financing was slated for $5Mil, however, due to heightened interest, the company accepted $7.5Mil. Feedback from Ruckify management suggests that the raise was well distributed, with some high-profile investors entering the story and/or adding to their positions. We are encouraged by the success of the raise as it confirms our view that the company is making headway after years of development. Given that Ruckify is a private company, it is worth noting that all investors hold the same common shares and the Company aims to go public in 2020, which distinguishes it from other private investments that are often defined by gamed valuations and ill-defined liquidity windows.

Ruckify is a digital sharing marketplace where businesses and individuals can rent out, or “Ruckify”, a wide range of items. The company aims to be the AirBnB of “stuff” and is well on its way to becoming the world’s largest “rent-anything” marketplace. The global sharing economy represents a tectonic shift in consumer behavior and this trend is underpinned by improved technology, convenience and value when compared to many traditional business models. In addition to providing a newfound degree of economic freedom, Ruckify enables its users to experience more, but consume less; thus, having a favorable long-term impact on the environment.

Ruckify is currently in 24 cities in the US and Canada and has been fine tuning the user experience in the marketplace by working with customers and tweaking the technology where required. The first phase of the company’s rollout involves marketing Ruckify ProStores to existing small-to-mid sized rental companies that do not have an online presence. The value proposition for these companies is compelling, as they can have a turnkey online rental business in one transaction. Just as Shopify provides traditional buy and sell businesses with a full online business platform, Ruckify can provide this for companies with a rental focused business model. For example, were a rental company to use Ruckify ProStores, they immediately have their own branded webpage, product insurance, order flow management, billing, payment processing, client KYC, marketing services and delivery via RuckTrucks. We believe the opportunities for Ruckify’s disruptive business model are tremendous.

Moving forward, the company will ramp up its marketing towards traditional businesses looking to monetize dormant inventory. For example, Ruckify now works with select Play It Again Sports stores, offering these franchisees an additional revenue line with relative ease. Ultimately, the company will aim to turn on the peer-to-peer element of their marketplace model in additional cities that have ample supply and strong activity. Further growth could come from bolt on acquisitions of companies in different sharing verticals, like the recent acquisition of WheelEstate, an RV sharing marketplace. Through these strategic acquisitions, Ruckify benefits from deep domain knowledge, an established userbase and existing revenues.

Ruckify currently has an enterprise value of ~$30Mil, which is modest in relation to the team involved, its technology, its novel business model, high profile shareholders and first mover advantage. Torrent believes that the company will trade at a significantly higher valuation as it executes on its business plan and moves towards going public on the Nasdaq Stock Exchange in 2020.

Despite our solid performance and promising roster of investee companies, the Fund continues to trade at a steep discount to its Net Asset Value. As of last quarterly reporting period Q3 2019, TORR’s closing share price was $0.35 per share and its NAV was $0.52 per share, representing a discount of 33%. While it is not atypical for a publicly traded investment fund to trade at a discount, given the liquidity and manager risk inherent in the business model, we believe that this discount is overly aggressive. We are confident that this valuation gap will narrow as the Fund matures and the merits of our disciplined approach are better communicated to the market.

A detailed overview of the Fund and its holdings can be found within our financial statements that are posted in the investors section of the Torrent Capital website.

Thank you to our valued shareholders for their confidence and trust in Torrent Capital thus far. We look forward to continued success and will be updating you on a more frequent and thorough basis moving forward.

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