Tuesday, March 3, 2020

Captain Cook

There is a time to take naps. Today is not that time. It's time to buy Canadian biotech penny stocks.

When you lose a tooth, the bone supporting it from underneath recedes, foiling any secret pacts you had with the tooth fairy for a replacement cuspid. Even worse, your face sinks in, making you look creepy and deterring prospective employers. That's where Lattice comes in. Lattice makes the scaffolds for the bones to regrow. When they asked folks for bone donations, the folks said, "over my dead body". The fine fellows at Lattice took them at their word, and looted their corpses for profit.

Not too long ago, Lattice was losing money on everything from breast reconstruction allografts to spinal fusion surgery. Their tech was supposed to make them a lot of money, but they didn't count on competition. When Guy Cook (hereinafter "Captain Cook") realized the numbers weren't working, he took an abrupt right turn and shifted focus to dental. It's working. Gross margins flew from 20% to north of 50%. Lattice went from losing millions of dollars a year to making a little bit of money. In 2018, Lattice earned revenues of $1.2 million. In 2019, Lattice earned revenues of $2.2 million. I'm no statistician, but that's what I'd call a favorable trend.

Here's what's happened:

In 2017:

Relocated factory to Montana - saving a million bucks in annual rent.

Completed debt for equity swap at 15 cents a share.

In 2018:

Completed debt for equity swap at 10 cents a share.

Exited competitive, low margin businesses - now they only sell to dentists

Invented AmnioBoost

In 2019:

Revenues took off - from $1.2 million in 2018 to $2.2 million

Gross profit margins leapt from 20% to 50+%

They have loads of other products too, and while I don't pretend to understand what any of them do, they're repurposing all of them for use in dental allografts. They aren't selling these yet; they're building inventory and working out the logistics. To deal with logistics hangups, Captain Cook came up with a new liquid nitrogen shipping container, and let me tell you, there's nothing I like more than Saltine crackers doused in liquid nitrogen.

What would you pay for a company with expanding 50% gross profit margins, and accelerating double digit revenue growth? The stock market says 0.77x last year's sales. The past is behind us. Think about where this will be in a few years. They crossed break even this quarter - if you're willing to overlook a few noncash accruals. The company expects revenue to grow 40% this year. What happens after they smooth out the logistics and roll out the new products?

I would be remiss if I didn't mention that the company is insolvent. They owe money to everyone and his uncle, and they've been in default for years. They auditors worry over whether it can continue as a going concern. I intimated in my last post that Navios is the biggest cash combustion corporation on the NYSE. Well, the only reason Lattice doesn't qualify is that it's traded on the Canadian Venture Exchange. The stock has fallen approximately 99.99% since 1997. It's safe to say that they don't have many happy investors. That's why you get to buy it for less than next year's gross profits.

The balance sheet is a mess, but this is not what it looks like. If you owe the bank a million, the bank owns you. If you owe the bank a trillion, you own the bank. Cap'n Cook has the upper hand. Can the bank really foreclose on a stack of assorted office stationery and a pile of bone powder? If they foreclose, they lose. If they extend and pretend, they might win. Lattice has been insolvent for years, perpetually bleeding cash. Why would they run into trouble now that they're growing rapidly and finally profitable?

Lattice is working on converting a big chunk of their hefty debt load into equity - likely at a substantial premium to today's stock quote. The Venture Exchange blocks debt to equity swaps at less than 5 cents a share. I've chatted with Captain Cook, who confirms that swaps will take place at a minimum of 5 cents a share. The stock trades at 2 cents and a market cap of $1.6 million. Supposing they need to convert $4 million to equity (probably on the high side) @ 5 cents, the market cap is really $3 million, or less than 1x this year's sales. Not bad for newly stable company growing at 40%.

The Cap'n owns a third of the company. He wants the stock to make money at least as much as we do. I don't know what Lattice Biologics is worth. I suspect I won't go wrong buying it at 2 cents. Last but not least, all these numbers are in Canadian dollars, which are worth 27% less than real dollars.

Caveat Emptor: Lattice Biologics is an insolvent Canadian biotech penny stock.

Disclosure: I own shares of Lattice Biologics.