As a big fan of micro-cap shares, I thought I'd take the time to review three fast-growing companies that could be about to take off. Below is a summary of three of my favourites micro-caps to buy now.
Dorsavi Ltd (ASX: DVL) has a market capitalisation of $66 million. It develops technology that accurately measures human movements in elite sports, occupational health and safety, and clinical settings.
Dorsavi's solutions include both sensors and software. The company earns both upfront product revenue and ongoing recurring fees. However, the breakdown of these two separate income streams is not currently disclosed.
The business has three key markets of Australia, Europe and the USA. Australia remains the largest revenue contributor at $1.1 million for the first half of 2017, but Europe and USA are far more significant in terms of growth potential. Indeed, the USA division recorded $0.5 million of revenue in the first half of 2017, exceeding total full-year 2016 revenue for the region.
For the first half of 2017, Dorsavi grew sales revenue by 33.8% to $1.7 million and reduced losses by 59% to $1.3 million. The company is well funded with $11.7 million in cash which given current growth rates, gross margins and cash burn should be sufficient to reach profitability in my opinion.
My one concern with Dorsavi is that wearable technology is a competitive field. I wouldn't be surprised to see the likes of Fitbit or even Apple become direct competitors to Dorsavi in the future.
Mach7 Technologies Ltd (ASX: M7T) has a market capitalisation of $54.9 million and develops healthcare imaging software. It also has a small medical 3D printing business.
The company's software is installed at 529 sites in 11 countries and customer contracts typically last five years with an increasing proportion of revenue paid monthly rather than upfront. It is costly for customers to switch providers and so combined with the transition to monthly invoicing, it is reasonable to view the revenue that Mach7 earns as recurring in nature.
In February, Mach7 announced that it expects to achieve profitability at the earnings before interest, tax, depreciation and amortisation (EBITDA) level in 2017 on the back of surging revenues. Revenue for the first half of 2017 rose 40% to $4.8 million on a pro forma basis. The company's growth potential is significant as its products address a multi-billion dollar global market.
As predominantly a software company, Mach7 earns very high gross margins – 94% for the first half of 2017. Consequently, most of the revenue growth for the period converted to incremental profits. EBITDA losses fell from $3.3 million in the prior corresponding period to $1.4 million for the first half of 2017.
Clearly, significant revenue growth is required in the second half of 2017 for Mach7 to achieve a breakeven result for the year and so there is a good chance that the company will fall short. Mach7 had $5.8 million in cash at 31 December 2016 so should not need to raise any further equity assuming this goal is met.
Unlike the above two businesses, Cyclopharm Limited (ASX: CYC) is already profitable and yet has the lowest market capitalisation of the three at $47.8 million. The company's main product is Technegas, a lung imaging technology whereby the patient inhales radioactive gas.
Cyclopharm also enjoys an attractive annuity like income stream. Technegas consists of a generator and consumable Patient Administration Sets (PAS). Generator sales are one-off, high value and low margin, whereas PAS sales are recurring, low value and high margin. As the base of installed generators grows, so too does Cyclopharm's high-margin PAS recurring revenue stream.
Technegas is currently approved for use in most developed global markets outside the US for testing Pulmonary emboli (PE). PE is where arteries in the lungs become blocked by a blood clot. Cyclopharm is currently pursuing regulatory approval in the US as well for Chronic Obstructive Pulmonary Disease (COPD) which is a much bigger market than PE.
Revenue rose 14% to $14.4 million in 2016 and underlying EBITDA from the Techegas business increased 15% to $3.4 million. However, statutory EBITDA was just $1.5 million largely because the company spent $1.1 million on progressing regulatory approvals.
And this is the risk with Cyclopharm. The company could potentially waste years of profits on pursuing FDA approval with no guarantee of success. On the other hand, if Technegas is approved for the US market or for COPD, then the stock would be worth multiples of its current price.