Memex’s Recent Results:

It’s been a fruitful week for Memex (MENXF, OEE.V). Following stellar projected Q3 results (104% Y/Y in revenue and a gross margin expansion to 72.5% from 50.4%), the company released news that Pioneer Products Inc has placed an initial 11 machine order for MERLIN enterprise edition and that both TECT Corp and AeroFit LLC, current Memex customers, expanded with follow-on orders. This post was released first to PRO Readers last week.

Updated Projections:

I tell every MicroCap investor, “Get the story right, and the financials will take care of themselves”. In this case we humbly believe that we got the story right, and now its time to update our financials.

Revisions:

Assuming a 50% Q/Q revenue growth rate in Q4, we have revised our revenue estimates downward for 2016 from $4.16M to $3.43M. With Memex’s strong sales ramp underway (53.5%, 42% and 104% Y/Y revenue growth in each of the last 3 quarters, we believe this is conservative.

We were pretty close in our 2015 revenue estimates, only off by ~$80K, and we projected a gross margin of 69.3% in 2016 overall, which is below the projected 72.5% GM for Q3 2016. Granted annual is blended but it will move towards this rate.

For reasons we will describe below in more detail, we have projected 200% sales growth Y/Y into 2017 and 2018 based on modest increases in op-ex (Ciscos agents reselling, SaaS model packing 72.5% GM’s, development completed as Memex is commercialized), and see the company doing$21.4M in revenue in FY18′, up slightly from our original projections of $21.08M.

Projections:

We decided to go with a more specific valuation method: the enterprise value / revenue multiple route versus just the simple price to sales route. Software Equity Group releases detailed updated statistics on the SaaS industry (see below for a snapshot).

Granted Memex had a ~6x EV/Revenue multiple in 2015 and 2016 we’ve discounted this down to a more conservative 4.5X based on SEG’s research. The difference between 6x and 4.5X is a large discount too in our opinion, as its the number multiplied against total annual revenue.

Further discounting Memex’s 2018 enterprise value by 10%, and using a 4.5x EV/Revenue multiple – we arrive at an enterprise value of ~87M and a share price of $1.06.

Growth Drivers:

• Memex’s strong growth ramp we’ve discussed has begun. Organic growth has validated MERLIN and the company saw 5 projects, 5 follow on orders in Q3 alone.

• In Q4 Memex saw 2 follow on orders and 2 new customers.

• Management has informed us that the company has added additional sales reps, which can take time to deliver, but is bullish for 2017.

• We discussed the Cisco / Mazak partnership in our original report, although the unveiling of it at Cisco Live is very fruitful in our opinion. Cisco’s thousands of sales reps will be pushing SmartBox IoT solution (collaboration between Cisco and Mazak), and by association, MERLIN.

• MERLIN is the software component of SmartBox, used to visualize shop-floor and machine data to make them more effective (i.e. 300% IRR). It is our understanding that the limited “freemium” version of MERLIN will ship with each SmartBox. If even a small number of users upgrade to MERLIN enterprise edition, this can offer significant sales for Memex. At the least the free exposure and marketing is huge in our opinion, and since the offering is validated organically, we believe many will upgrade.

• Memex is presenting at the International Manufacturing Technology Show in September. We expect Memex’s presence in a booth at the conference.

• Memex’s free exposure due to the collaboration is being pushed. See anexample (MERLIN DEMO included in this event for example) – Mazak one of the world’s larges machine manufacturers. The company is also attracting mainstream media coverage – such as on BNN .

• We believe Cisco Live was a larger event than most assume. With 25K attendees and 4,500 sessions, Memex was present in Cisco’s booth too. Sales take time to form, but we believe this will aid in growth for 2017. ( see our post)

• While Memex’s client list is impressive, we believe MERLIN has been very clearly validated in the marketplace. We are awaiting the company to secure a mega client – which should happen in due time.

Warrants:

• ~3.8M warrants’ due June 24 at $0.16 (passed)
• ~5M warrants due Aug 9 at 0.16 (last day is this Friday)

While 8.8M in warrants could result in $1.408M for the CO, we believe only the latter portion will be exercised since they are ITM, and the June tranche was borderline or below 0.16 for some time – or $800K cash to the company.

A ~10% reduction in the Shares Outstanding (8m/78M in FY15 used in calculations) is a bullish event for shareholders.

Our thought is that the latter 5M tranche will be exercised if it hasn’t and will be churned through. With 1.7M and 1.4M volume days last Thursday and Friday alone, they may have already been churned. If not, it could mildly hamper short-term share appreciation before continuing.

The company does have a longer dated warrants totaling ~12.9M at the current share price of $0.25 . As Memex’s story continues to grow, I do not see these as an issue of being churned through. Further, I think the holders would rather wait until the story improves even further to execute than do it right now as the PPS has just touched 0.25. (note: the volume to exit 13M shares above 0.25 for ever share isn’t there right now, so we believe they will wait)

Also, note that if exercised, the ~12.9M tranche would result in $3.23M to the Co. As noted we don’t believe Memex has to raise money again, but this tranche really hits that nail again.

Cash:

With $2,249,410M in cash as of last quarter, the company did burn $1m+ Q/Q.

Although we believe that the company has significantly cut its cash burn to the 500k-700k range after several conversations with management. Granted new sales people were hired so it could be towards the high end of our estimates.

At the high end, the company burned 700K this quarter, and has two more quarters of cash. Add in the 800K from the warrants and thats another quarter. Overall 3 more quarters worth of cash. Our projections have the company being profitable in 2017, so we believe they will not have to raise additional funds.

Institutional Ownership:

It is worth noting that Memex has under 1% institutional ownership which is a very good note. Remember Wall St. (banks, hedge funds etc)can’t sell what they don’t own. This is wonderful for Memex since they’re no fund trying to manipulate shares or “exit” a large position.

On the flip side, when institutions do come into a MicroCap when they finally spot it, that is equivalent to a technician pressing GO on a rocket in a sense. The reason is that institutions need big blocks of shares to make their position worth while, and MicroCaps are illiquid so the shares are bid up easily. This is why you should embrace illiquidity.

Conclusion

We like to temper our expectations, but we like to make it very clear to our members that we are searching for 100 baggers – and the only way to get there is to hold through 1x-99x. Granted, the story has to be improving which is clearly is here.

Please be aware of all of the risks associated with MicroCap stocks, and investing in general. Please post any and all questions below.