Stock Talk Podcast Episode 338

Speaker A: Foreign.

Speaker B: You are listening to Keystone stock Talk show, episode 338. It's great to chat with you again. This week, Brennan kicks off our show with a quick case study on software. SmallCap Zillajist Limited symbol SYZ on the TSX, including Keystone's buy and subsequent sell on the stock. Silajist is a SaaS provider that delivers mission critical business administration software such as ERP CRM solutions tailored specifically to nonprofits, public education and local government organizations. Rahil closes the show with his bull and bear case on the Fresh Factory limited symbol frsh on the TSX venture after the small cap, which is a vertically integrated contract manufacturer and private labor labeler that formulates, develops, produces and distributes fresh clean label and plant based food and beverage products. That's a lot to say. Reported its Q1 numbers. All right, let's get to the show. I welcome my co host, the killer bees, Brett and Brennan, and our newest edition, Rahil. Welcome, gentlemen. How you guys doing?

Speaker C: Doing well. Salutations.

Speaker B: Salutations. Well, Brandon, uh, the world is waiting for your answer. What kept you away from our podcast last week? Something special went on there, didn't it? I believe.

Speaker C: Yes. Yes. I finally can stop saying on the podcast that I want to buy a house, because I did buy a house,

Speaker B: and no one cares about that. Something else happened.

Speaker C: And, uh, and on possession day, uh, I proposed to my girlfriend, Carly, or now my fiance. Um, big news. So. Yeah, big news. Huge news. After years and years and years of striking out. No, I was going to say of getting slandered on the podcast by Ryan about, you know, I just couldn't find a girlfriend. Um, I finally got the last laugh.

Speaker B: It's amazing. No, congratulations. That is. That is big news.

Speaker C: Thank you.

Speaker B: You can officially start posing as an adult. That's good.

Speaker C: Yeah, exactly. I mean, that's what it feels like. I mean, me and Ryan were talking about it earlier, but even just, you know, getting into our new new home or moving a bunch of stuff over from my, you know, condo or my apartment, uh, that my, my parents own and Carly, you know, is selling her old house and, you know, it feels weird. It feels like I need to go and knock on the neighbor's door and, you know, bake them a pie or something and, uh, say, well, she was an adult.

Speaker B: We're just saying. You're kind of.

Speaker C: Yeah.

Speaker B: Finally. Right. So. Yeah.

Speaker C: It is true. It is true.

Speaker B: That's. It's amazing. Congratulations. We're happy for you.

Speaker C: Thank you.

Speaker B: We're happy.

Speaker C: Yes.

Speaker B: It's Good. All right, let's get on to the show. That was the big news. But, uh, we should get on to. There's some news in the markets this week. What do we want to talk about first?

Speaker C: Uh, maybe the poll first.

Speaker B: The poll. Yeah, let's do the poll.

Speaker A: Yeah, we can start with the poll question. Um, so the poll is just what market style the following do you think will perform the best over the next 10 years? And the 41 of our listeners said U. S value. And these are all US 22 said US growth. So you have a skew, uh, towards growth between those two styles. And then 14 said US large cap with 20 foot or percent U. S small cap. So askew towards small cap value, which, given how we invest, that, uh, would make sense for the most part. And yeah, uh, I can't say that's too surprising.

Speaker C: No, me neither. And to be honest, you know, every Thursday Brett comes to me and he's like, brennan, we need a poll. Get on it. So, you know, I saw an article, uh, I guess this was a couple of weeks ago now, um, but it was a Vanguard, uh, Vanguard capital markets model. Forecasts came out, um, you know, and they released this on April 22, 2026. They indicated that their outlook for stocks and bonds did improve modestly with US Equity valuations declining to some degree, allowing them to raise their 10 year return outlook by 1 percentage point. Uh, however, you know, valuations are still significantly above long term fair value. They indicate now over the next 10 years. If I scroll down here, you can see that they're uh, projecting U.S. equities to return about 5 to 7% with U.S. growth stocks, uh, lagging us. Here's U.S. value and also U.S. uh, small caps. Um, but you know, if we click on the current US Valuations up here, uh, we can see exactly why as US Value and US Small caps continue, uh, to, to be somewhat undervalued, or at least this is what Vanguard says. Um, you know, and this is something.

Speaker B: Yeah, they diverge in their valuations, right?

Speaker C: Yeah, exactly. And this is something that we've been speaking about for some. So, you know, looking at our poll results, you know, I think that it's, you know, interesting, maybe not, you know, completely unsurprising that, you know, our YouTube listeners are getting to a similar conclusion of this report. Although, you know, there may be some bias there. Our YouTube listeners are probably tend to be more value or small cap, uh, driven investors generally. So again, there could be some bias there. Um, but yeah, I think that, you know, it's interesting especially where you know US equities overall are you know, very stretched this report says. Vanguard says um, you know, again, meanwhile, US value and US uh small cap are, are quite low.

Speaker B: Yeah, it's interesting. I'd like to see exactly how they define US value. But you mean you see like we see this like general US equities and it is powered by the larger cap company uh, are stretched in valuations. It's almost at the hundredth percentile there.

Speaker C: Yeah.

Speaker B: But there is some relative valuation uh, divergence there and we've again we've been talking about that it has closed somewhat. It's actually closed there. Although the US equity large caps keep moving this way. Right. So the small caps are trying to catch, they have been going faster and that gap has narrowed. But yeah, there certainly is some uh, ah, preferential valuation there in terms of where do you want to go with your capital now you're higher risk in the small caps. But um, you know I would argue if you're paying an absolute market premium like you're paying the highest multiples that you had, maybe there is some high quality smaller cap companies that offer uh, less risk right now than some of the perhaps overpriced larger names.

Speaker C: Yeah.

Speaker A: To answer your question, uh, on how they define value, it's what they're doing is the lowest 1/3 um, price to book for the Russell 1000. So you can look at the historic 3rd versus current 3rd and see how the art is it higher or lower? Effectively I assume that's what they're doing just from quickly looking at it.

Speaker B: But yeah, it's a general way of doing it. Obviously we'd look to see if it's a value based on the individual fundamentals of that company.

Speaker A: Right.

Speaker B: Because there's either there's sometimes value traps, there's. Yeah, yeah, of course, yeah.

Speaker A: Especially when it comes to price to book. You're going to have yeah, big price to books but then it's not tangible assets, it's a goodwill where it's, that's going to get impaired or you expect it can be impaired in the next couple of years. So price to book, even though it's commonly used for value indexes like this and ratios and uh, overall market valuations, it isn't perfect. You got to always take.

Speaker B: Yeah, there's a lot of companies with a low price to book multiple that we wouldn't touch with a ten foot pole. We just wouldn't get anywhere near that. So you obviously you're going to look at the individual fundamentals of that company before you made any decision whether or not it was actually deep value or not.

Speaker A: Mhm.

Speaker C: Yeah. Okay, maybe we want to just jump right over to you know, maybe the Canadian economy just quickly.

Speaker B: Sure, yeah.

Speaker C: Um, you know they, the Canadian economy added 88,000 jobs in May, uh, which you know, crushed uh, expectations essentially. Um, you know, if you've been following it really earlier in the year there have been you know, quite a few job losses and this strong performance, you know, caused the national unemployment rate to drop from 6.9% down to 6.6%. The only thing that I really want to mention here is we recently spoke with you know, a subprime lender, uh, you know, last week, uh, company, um, you know a small piece of their business is in Canada. But that was one of our main questions is you know, how is the credit quality of consumers in Canada versus the U.S. and generally speaking, you know, even though a small piece of their business is in Canada, you know they reiterated that um, you know, Canada does remain resilient despite you know, all of the headlines that we are seeing. I mean I know that CPI had come out uh, and it was uh, you know, softening quite a bit. Um, but you know it's good to see uh, you know, that we're adding some jobs for sure. Uh, especially just what we've been seeing, you know at the beginning, the beginning of the year.

Speaker A: Yeah. One of the points that I want to highlight here is actually just the youth unemployment because for a period it was actually very, very high um, record of 14.6% a Ah, recent record uh, in just September and now it's actually fallen for the first time since January to 13.4%. So actually an improvement in that space where it's been very, very weak. So are we seeing overall resilience and is. Yes. And as well we're seeing uh, you know, what was quite a bit weaker.

Speaker D: Mhm.

Speaker A: And it's highlighting here as well better student job market. Which is, means normally you have extra capital, you can have these student jobs because that's one of the easier low hanging fruits if it's just a short contract, you know, that the university kid or high school kids are only going to work for three or four months at most. It's easier just to with not go through that process if you don't need that extra staff. So it actually is I think a quite positive sign.

Speaker B: Yeah, um, perhaps um, the, some of the companies determined that they can't do everything with AI and had to hire something back. I'm not sure, I'm not sure what inch that up. Uh, it got to a high level on a relative basis. So yeah, it's, it's. I mean it's good to see. We want, you want. I uh, was going to say kids, but university level students, uh, you want them getting some job experience. I mean they're going to power the economy in the future. They need that. It's, it's not good for the economy overall if they're not in the workforce in some degree at least testing themselves out.

Speaker C: Yeah.

Speaker B: Okay.

Speaker D: One thing I would like to call out is um, when you um, dig deep into which sectors picked up job numbers. There were um, manufacturing, construction. And it's good to see those sectors picking up um, some jobs. Manufacturing especially was heard because of tariffs and cross border issues. Um, but we should keep an eye on the numbers. You know, is, is this forming a pattern? We don't know. If the next month also um, shows up with positive uh, beat, uh, versus the expectations, then it may be a turnaround on the employment side for, for, for Canada.

Speaker B: Yeah, it nice to see. I mean part of that, I mean this is anecdotal, uh, but would be uh, I would think confidence uh, after like the markets were absolutely shaken like around you know this time last year, just over a year ago. And uh, you just freeze up in terms of capital spending. Right. So maybe they've normalized. I mean the environment isn't normal, but they normalized to a degree. And some of these half, some of the projects really have to move forward. So they're saying okay, we need to start to move forward. And it's nice to see that, you know, maybe this is showing up in the numbers. They're doing some hires to get these projects going that need to be going. So is that going on? Can we track that? Will it continue? That would be uh, that would be good for the Canadian economy because we need it for sure. We need more jobs. We need. And those segments of the economy, we need jobs in it for sure. Um, do we want to talk about Alphabet? Quickly here they. Alphabet launched a historic 84, almost 85, $84.73 billion equity raise. That is the largest raise in US corporate history, surpassing previous global records. Uh, the money is earmarked for aggressive expansion and artificial intelligence infrastructure data centers to meet unprecedented compute demands. Uh, the private placement part of it was about 10 billion. Warren Buffett's Berkshire Hathaway agreed. I tried to put two words together to anchor the deal. They purchased about 5 billion in Class A shares and 5 billion in Class C shares. Now the public offering is 35.75 billion upsized mix of class A and class C shares. Uh and there's an atom market program of about 40 billion billion. Uh this is again this is despite the company roughly generating 174 billion in operating cash flow over the past 12 months. Uh Alphabet is earmarking Capex to surge to about 180 to 190 billion this year. So it needs a ton of capital. Um, you know in this case uh, the company may be getting ahead, jumping the market. There's a ton of capital going to be flowing into like names like SpaceX and Ah anthropic and OpenAI. Um now you know one thing I see is a number of companies at highs in markets I've seen this in the past. Um, some companies don't raise capital. They think the good times will continue forever and for just go on into the future. I mean Alphabet itself, ah, after the massive surge in its company's share price uh just from the lows that it hit in 2025 uh it was just trading at its highest price to cash flow multiple in a decade. So um, if, if you just look at it from their valuation perspective, if you're ever going to raise um, raise at your highest valuations in a 10 year period, um, the other thing I would say too is they have from years ago significant investments Alphabet, I mean they uh, have significant investments in SpaceX and in anthropic which are now coming to the market and those investments are now on paper worth far more than what they just raised. So I mean it is uh important to remember that if they could crystallize those they could probably buy back any of the shares in theory that um, they issued uh, on this capital raise. Now it was interesting to see but I think they are trying to get ahead of the market here at a time where markets, I mean we saw Brennan brought up the chart stretched. General valuations are um, we don't love raises typically. I mean if you can get a return on that equity fine, right it makes sense. But um, if you're gonna do it like I see companies, wait, wait, wait and their share price was here, they end up doing it here. The dilution is like double what they would have had. Like I've seen that happen many times that playbook. If you're going to do it for a massive capex and you can justify it, make sure your shares are trading at a premium, Alphabet's at least in this case we can say it's a 10 year premium on our price to cash flow basis.

Speaker A: Yeah, and you bring up a good point. Just with them having the SpaceX and Anthropic shares is.

Speaker B: I do wonder what's going to happen.

Speaker A: Yeah, no, I'm curious, is it going to be a rush for the door with once the lockup's done over all

Speaker B: these insiders, are they holding long term? I don't know.

Speaker A: Yeah. Is it strategic or like Microsoft and OpenAI because they own 20, 20 something percent.

Speaker B: Yeah.

Speaker A: And it's obviously massive and if they start diluting that can shift the market in a moment's notice.

Speaker B: Is it more, I don't know, is it more strategic for them to continue to own anthropic and sell SpaceX or. I, I don't know, maybe. I don't know if they. Yeah, we will see their plan over time. But um, it is interesting. But again, really, I don't know if it's good bets on a cash flow basis in the near term, but good investment bets again by the Alphabet team for sure. Like they made tremendous amounts of capital on those initial investments in those companies on paper right now. I mean it's. It's on paper.

Speaker C: Yeah. Even just raising in the current, you know, market environment, like, even like I was listening to Howard Mark's podcast, you know, a while ago and he just spoke about when, you know, in 2007, I believe, you know, he was, you know, going out, raising a lot of money, um, and wasn't deploying it because, you know, he thought that, you know, money was maybe a little bit, uh, or things were just getting a little bit too frothy. It's not like he knew that the subprime mortgage collapse was coming. Um, but you know, he made the point on the podcast. It's just like when the market is, you know, pricing things at a value or pricey, um, you know, this is the time to raise. He's like, good luck, you know, trying to get some capital when, you know, everybody sticks their head in the sand and wants nothing to do with investing, you know, so again, it's just prudent by, by Alphabet here.

Speaker B: Yeah, I mean their valuation went up almost like, almost 50%. Right. Like in that range over a year period. Um, is, is it more likely that their valuation goes up another 50% or comes down over the next, you know, 20, 30% over the next three to five years at some point? Um, so yeah, they're taking advantage of a market that's high. Uh, I often don't see companies do that there's some Canadian small cap, the US small cap companies right now that are trading it off of price to sales multiples that you know, if I were them I'd be, you know, if you need capital, which many of those companies do raise uh, it now uh, while the markets are high because there is always a rainy day. Everybody thinks there is until you know it comes. And uh, then you'll be now looking back saying oh God, why didn't we do it then?

Speaker A: But yeah, yeah, no, it's, it's kind of interesting how we see you when it's a company that is valued off of price to sales and those are the ones that get so, so frothy is they should be the ones raising because if you are valuing off a price of sales normally you're not making money in either accounting center cash flows. It makes sense for those companies too. And they never really seem to be uh, looking to raise money when they should be. It's only once it's down.

Speaker C: Yeah, uh, yeah. Last thing I'd say too is I just, I'd rather be looking long term, you know, I'd rather be participating in this uh, round of Alphabet rather than you know, getting into SpaceX. The SpaceX IPO for sure, you know. Ah, again just completely.

Speaker A: I did read it is over subscribed already so you couldn't. Anyway.

Speaker B: Yeah, I would expect, I expect. I mean every time I log into any brokerage account, you know they're like if you've got questions on IPO related questions, which is for these three big IPOs, they're getting flooded. All the brokerage discount brokers is getting flooded and go to that they've created special IPO area to go to because uh, you know there's such a crazy demand. Um, it's going to be very interesting to see when they come online. You know, they may surge initially, they may not. Uh, when Facebook came online people thought that that price would surge. Uh, there was a ton of retail demand as well. The stock initially cratered, you know, not initially, but over the next, I think it was a year or two or something. Um, perhaps there'll be actual entry points for these companies. Um, you got to create some cash flow for me to get interested. But that is interesting. It'll be interesting to see what happens and people predicting money flowing from other sources. We'll see what, what, where, what those sources are. So it'll be interesting to.

Speaker C: That was funny that uh, over the next uh, month, even just last week, I know like there was a lot of social media buzz going around that like the biggest reason for why the stock market and bitcoin, uh, selling off was because people are, you know, trying to, you know, uh, raise cash in their own portfolio so they could try to partake in, you know, some of these, you know, frothy IPOs. Again this is just.

Speaker B: Yeah, so you're taking from that to go into some of the more pricey IPOs ever. I mean I, I know they're high value, but we're talking valuation off earnings. Well, in many cases no earnings. But it's just going to be interesting to see the way that plays out. There has been, there was also if we can shift to, uh, there's some activity in the small cap arena in terms of acquisitions over the course of this week. Um, neat.com, a, uh, good business, a software company that does digital validation. It has a digital validation platform primarily for like highly regulated industries. Pharma, biotech, medical device manufacturing was uh, acquired this week. Uh, so it's interesting to see like any of these SaaS companies that had a massive hit. I mean you look at most, if not all SaaS related businesses, um, over the last six, eight 12 months, you know, 30 to 70% declines across the table in these businesses. So are we going to see, um, some of the smart money potentially? I mean, maybe this is smart money. I mean it is a large, uh, SaaS based acquirer, private equity that acquired this company. Uh, maybe they're going to say, okay, you know, this is a business we were looking at a year ago. It's now 50% off. Um, are we going to see more M and A activity in that segment? Um, there's certainly. Even with the drop in neat now, if you look at it on an EBITDA basis, this deal is above 60 times trailing EV to EBITDA. So they paid a high price. Now that could come down as the profitability increases of this business significantly. And obviously that's what they are looking for to do that, uh, to have the profitability come down. Sometimes they're looking to buy them at these prices, um, take them private, uh, grow the cash flow in a market that doesn't look at cash flow on a weekly basis and then bring them to market again. There may be a time in the future where people don't say SaaS and borrow from their mouths immediately. Like, you know, we're seeing that right now. I mean a year ago that was the place you had to be in the market for about 15, 20 years. So it can have its day Again, even though we think that or not, we. But the market, a lot of the market thinks that um, AI is eating SASS as lunch. That whole model is going to be disrupted. So it may again have a. There's many sectors that you think should be left for dead that come back and become sexy. I mean, I would have never thought that dry type transformers would be one of the sexiest things to own in the market because I watched a company like Hammond Power sit there, trade at 5 to 6 times earnings for 20 years and now it trades at 45 times earnings. So I wouldn't have predicted that, although we did say it's a way to play electrification and all that. But even sectors that look like they're boring can have their day in it, the limelight.

Speaker A: So yeah, it's interesting because you said like SAS was the uh, place to be for 15 years and yeah, undisruptible. And then you had a boring business like you're saying, having power. It seemed like the market gets quite complacent in certain sectors or names and it's then it will flip. And now we're seeing this and it could be a while before SAS now sees a, like a value, a mentality, uh, whatever market perception reset to where even if, let's say AI, it's an uh, enhancement tool, maybe it eats at the edges of SaaS companies, but overall the core is still there for many of these businesses. It might still be five or 10 years before we see any material increase. If you're buying at the peak SaaS in 2022. Yeah.

Speaker B: Uh, and uh, I would say that like we've talked about it sounds really pessimistic on valuations. We saw like general US equities trading at the highest level in their, you know, historically all time on a valuation basis. I mean AI threats is creating opportunities. I mean we're looking at an engineering type firm, um, right now that it, you know, has come on sale significantly from its highs, uh, over the past just year. And there's AI threats now. Many believe that AI could be a tailwind for this segment, you know, make it more efficient, make. So, you know, if the market is wrong on this, there could be some significant opportunities that you're seeing, uh, in sectors that uh, the market is getting wrong on AI's influence over the long term. I mean I'm sure it is going to help some segments. It's not going to just kill, uh, everything. So you know, if we can find those opportunities. When you see, and you look at many of the Engineering names that were relatively high valuation just a year ago have come down to like five year lows in terms of their valuation. So we want to take advantage of some fear where there's fear and it may be unjustified and you know, some of the management teams or even just people who you, uh, respect in the business are talking about this actually being a tailwind, yet the market is selling off due for fair reasons. So I mean it, there could be some opportunities too. And there's many companies, uh, a couple that we've kind of recommended recently that are trading at the lower end of their range that you're trying to get, you're never going to get the exact bottom. But if it's a good solid business and it's growing, I'd rather buy it when it's on sale than, than, um, when it's at an absolute premium. Yeah, like not everything's at a premium right now.

Speaker C: No, but like, you know, three years ago or four years ago, something along those lines. Gaming companies, you know, absolute lofty multiples now, you know, they're barely demanding a multiplier or there's lots that can't, you know, uh, unified communication, same thing. We've spoken about this, you know, in our, uh, internal analyst meetings, you know, fintech. I know I've said that on the podcast before. I mean, a lot of financials are still, you know, trading at loftier multiples right now. Um, but you know, again, you just, that's the thing. Like I spoke with a client recently and you know, he was trying to do a fair value on a specific, uh, AI company and he was applying, you know, the other comparable, uh, multiples, um, you know, on his own or on this other AI company that he's looking at and you know, getting a fair value. And yes, I mean, again, if the m, if growth can continue and these companies can continue to demand these, you know, significantly higher valuation ratios than, you know, their historicals. Sure. You know, that you, you could see that case play out. But you know, over the long run, um, does that premium valuation remain? You know, I don't have the answer for that, but that's something that you have to at least gauge or understand when you're, you know, doing something along those lines.

Speaker B: Next time have the answer. Okay.

Speaker A: All right,

Speaker B: well, I, I think, I think we've talked everybody's ears off. Unless anybody's got anything else to say.

Speaker D: Just, just one comment on neat. I know you, you touched on, uh, the valuation of need, but I was thinking from the standpoint of when a public company goes private right off the bat you are saving the cost of staying public, you know, million, $2 million. You save, you save the cost of uh, IR, you generate some operational efficiencies and you're able to bring the valuation down the moment you are a private company. So there are benefits to stay private in my opinion. Um, and able to generate more value of the company by staying private than public.

Speaker B: Yeah. And they, you know, the other thing is the focus isn't on your quarter to quarter results as well. You can do what is better long term. Uh, and I would say like I've seen it done before and then the business is um, you know, they go private and then they get to a scale where uh, they're better, you know, they can be repackaged and sold to the markets as a, as a public entity and the private entity gets out of the business that respect. I mean sometimes easier to grow. Particularly when your um, bottom line isn't as robust in that private environment and you can focus on the long term and you're certainly taking out those costs for sure when you're smaller it makes, it makes a difference, you know, taking out a million in costs, you know, taking out the annoyance of having analysts phone you all the time as well. Right. As we know some people would like. Yeah. Good. All right, we've got Brennan and he's gonna, you're gonna do a case study on a company that we know, uh, we bought years back, sold, made a profit, bank some dividends as well and uh, you're gonna take us through some parts of that equipment equation.

Speaker C: Yeah, exactly. So this is a name that our clients should be familiar with. As again like as Ryan said, uh, we recommended it back in 2016 at a uh, as a buy at a price of just under $8 per share and sold it above $10. But you know, I thought that I'd just kind of go through a bit of a case study on what happened with the business, what led to our sale and where the, the stock or the company is today. So Silogist, or I know some people call it Xylogist, is a software as a service provider of erp, CRM and other mission critical business administration software solutions to public sector organizations that operate in the non profit and non government uh, organizations, public school administration and local and municipal government market segments. They trade under the ticker symbol SYZ on the Toronto Stock Exchange. Currently trading at a price of about $3.62, market cap of about 88 million and they no longer pay a Dividend. So here is, you know that, that uh, a bit of a historical case study to start. So we initially recommended the company as a buy in 2016 at about $7.78 based on its reasonable valuation of about 16 and a half times earnings, earnings, cash out and decent growth. It also had a strong balance sheet with about 20% of its market cap in cash and a strong dividend yield of greater. It was slightly above uh, 3%. And the next few years following our recommendation, the company performed relatively well. Growing earnings and its annual dividend from $0.26 uh in 2016 to $0.50 per share in 2021. Now the pandemic did have an impact on the business as organizations were forced to pivot resources to handle crisis management rather than, you know, modernizing their own systems, uh, you know, through syllogist. But uh, 2020 came with a large change in management and strategy as Jim Wilson, the previous CEO retired after a 17 year tenure. And the new CEO, Bill Wood took over on 11-9-2020 with the strategic shift toward more SaaS, uh, as opposed to, you know, one off legacy licenses and maintenance contracts as well as an aggressive go to market expansion to accelerate organic growth. However, the stock plunged in 2022 under the new lead of Bill Wood. And his new strategy as silajist had gone from a quiet, you know, highly profitable micro cap with EBITDA margins consistently hovering between 40 to 50% now down to you know, mid 20% or the mid 20% range during 2022 to 2023 as the business was really trying to revisit, ramp up the growth. The dividend was also cut to prioritize research and development and the company was transitioning from you know, that once net cash position that we loved to a uh, now net debt position on the balance sheet. So you know, the new strategy was able to ramp up organic software as a service growth but overall revenue growth remained pretty weak, uh, held back by winding down legacy project services. So you know, Sila just found itself caught in this painful squeeze as it was no longer the ultra high margin cash cow it used to be and it wasn't being recognized in the market as a high scale SaaS compounder. Um, you know, even back at this time I believe it was, you know, mid teens, they were growing their, their SaaS, uh, growth at another thing that I'll also mention is a lot of tech stocks, you know, did come under pressure during this time, uh, just with you know, the bank of Canada and the Fed increasing interest rates. But By November of 2024 we elected to sell the stock at $10.14 per share. As we wrote in the cell report to clients. This is a quote right from it. We have provided management ample time to execute on its restructuring initiated in 2020. But as it stands the restructuring remains ongoing and the stock trades at over 30 times expected 2025 free cash flow. As such, we shift our near term and long term rating to a sell. And we gave clients, you know, kind of a range between 10 to 11 where they think that uh, they could uh, you know, sell their positions. The stock did go just briefly up above $11, um, but you know, we were happy to move on. And clients who bought on our original recommendation and sold on this cell received a total return including dividends of 65% or a compound annual growth rate of about six and a half percent which you know, isn't bad in the grand scheme of things. But you know, I think the, the nice thing here is we were able to get out at a pretty optimal time. Um, you know, I remember back uh, you know, in 2024 the stock was going up. You know we were happy with this, but it was to our surprise and you know, we thought this was a great opportunity. So you know, let's look at where the business is today and why the stock is down to just you know, $3.65, its lowest level since 2012, well over 2025. And following five consecutive quarters of earnings misses and intense public pressure from activist investor One Move Capital which owns 15% of the shares, Bill Wood resigned as Ah, CEO on January 28th, 2026. And after a brief interim period under Craig O' Neill and a formal board shakeup, permanent CEO Joel Litso was hired in May of 2026 with a strict mandate to restore disciplined profitability. Now I won't spend much time here because there really isn't much to dig into but uh, quickly going over the financials for Q1 2026 ended 3-31-2026, revenue was down 10% and uh, net loss was up to a loss of 3.8 million compared to a loss of about 1 million for the same period last year. And on the right hand side here I am showing the businesses cash in the amount of about 4 million. I'm rounding up there and a credit facility in the amount of 19.1 million, meaning the company remains in a net debt position. Uh, yet you know, they are burning cash and you know, the valuation multiples off of earnings, ebitda, uh, and cash flow are essentially non existent at this Point given the businesses uh, current struggles. So to wrap everything up here, our 2024 cell thesis Plato pretty accurately. While management successfully grew the underlying cloud technology, the operational blueprint was poorly executed and ultimately destroyed profitability, leading us to exit the position while the stock price was elevated. Now faced with a severely depressed share price and heavy uh, activist investor pressure from One Move Capital, the board finally took the necessary action leading to Bill Wood's resignation on January 28th, 2026 and a complete suspension of the quarterly dividend. And with the hiring of permanent CEO Joel Litso in May, the business is trying to pivot back to reality. Trying to shift away from a high risk cash burning growth strategy to focus strictly on cost cutting, structural repair and restoring disciplined profitability. So you know, it will be interesting to see if management can do this. The uh, last, you know, few years were really kind of a wash. Um, so you know, this is something that we'll continue to monitor going forward. And the disclosure here, we do not have a position in the company.

Speaker B: Okay, thank you. Um, yeah, One Move Capital I believe, um, was founded by Tyler Proud who was uh, Canadian tech entrepreneur who co founded uh, Diane Durham. So lots of activism, uh, coming out of the co founders of uh, Diane Durham as I understand. Um, yeah. And I think you may end up pounding your head against the wall with this company. Um, so I don't know if we. I don't want to be an activist in the business. We got out, um, the CEO that took over, um, I found him to be just more buzzwords than actual, uh, you know, teeth to anything that he tried to implement. And I think we can just move on based on that.

Speaker C: Yep.

Speaker B: All right, uh, let's look at a. Well, Raheel's going to close out the show with the Fresh Factory. Ah, frsh on the TSX venture who reported Q1 numbers recently.

Speaker D: All right, um, today we are going to talk about a small Canadian listed company called the Fresh Factory Ticker. Frsh on the TSX venture, the current share price is around $0.84 per share. Uh, this is a very small company but the story is interesting because it is a manufacturing business. The Fresh Factory is a contract manufacturer of fresh, clean label, better for you food and beverage products. In simple words, other food brands hire the Fresh Factory to make their products for them. The Fresh Factory does not sell its own brands anymore. Instead it builds packages and ships products on behalf of its customers. The company is based in Illinois in the US they have two manufacturing facilities right now. One is uh, Downers Grove. And in the first quarter of 2026, they took possession of a brand new facility also near Chicago. So once everything is consolidated, the company has 219,000 square feet of manufacturing space. Uh, they have four main product production platforms. One is, um, bottling lines for cold pressed juices, hydration drinks, smoothies and specialty beverages. Second, um, cup and pouch lines for dips, spreads, dressing and sauces. Third, snack bars and bites. And fourth, all of this is wrapped up in their vertically integrated model. They source ingredients, formulate the product with their fooding scientists, manufacture it and ship it. Customers do not need to hire three or four different vendors. The Fresh Factory does it all. On the left side of the slide you can see the basic numbers symbol is frsh. As I mentioned before, stock is trading at $0.84. Market cap is approximately 49.5, um, million Canadian dollars. And there is no dividend. Let me walk you through the history. First, the Fresh Factory came public in November 2021, not through a traditional IPO, but through what is called a reverse takeover on CSE Canadian Small Exchange. About two years later, in October 2023, they upgraded the listing on the TSX venture. Over the years they have raised money mainly through what are, uh, called private placements. Early on they were selling shares at 60 cents a unit. In March 2025, they did a $3 million private placement at $90 per pool proportionate voting shares. And this past January 2026 they did another 3 million dollar placement at $115 per proportionate voting share. Now this is the most important part of part of slide 2. The Fresh factory has two types of shares. The first type is subordinate voting shares or SVS. The SVS has one vote and these are the shares that trade publicly under the ticker. Frsh. There are 10.4 million SVs outstanding. The second type is called proportionate voting shares or PVs. Each PVs has 100 votes, uh, and each PVs can convert into 100 SVs. There are 473,000 PVs outstanding. So if you multiply 473,000 by 100, you get 47.3 million SVs equivalent shares hidden inside that small PVS class. So when you add together 10.4 million SVs plus 47.3 million SVs equivalent from PVs conversion, the real basic share count is approximately 58 million, uh, shares outstanding. So when you add the two together, 10.4 million. I said it already screwed. There are, uh, four strategic priorities for this year. First, uh, consolidate operations into that new 154,000 square foot facility. The whole reason 2025 had a margin pressure was because they ran out of space in in the old facilities. Moving everything into one bigger facility should fix those inefficiencies. Second, scale this snack platform, bars, bites, pastries and other pouch lines. These are the fastest growing product categories. Third, stay focused on contract manufacturing. They divested their own brands years ago. They want long term multi year contracts with other brands. And fourth, drive operating leverage. Last year, fiscal 2025 revenue grew 37% to 44 million. Adjusted EBITDA grew to 33.3 million. The goal for 2026 is to turn that growth into real GAAP profitability. Let's uh, look at revenue, uh, net income Trend on slide 3. You can see the chart of revenue and net income over the past few years. The growth pattern is very clear. Revenue went from $23 million in 2023 to $32 million in 2024 to $44 million in 2025. That is consistent strong growth. Net income has been very small. Sometimes a small loss, sometimes a small profit because the company has been reinvesting heavily. Uh, let me walk through the first quarter of 2026. Uh, this is the most recent data point. Revenue was $12.4 million. That is up 17% compared to $10.6 million in the first quarter of 2025. So the top line revenue, um, growth story continues. New customers coming on board and existing customers buying more across snacks, beverages and dips. Gross profit was only a million dollars. That is down a lot compared to $2 million in Q1 last year. The gross margin compressed from 32% last year down to 9% this year. Now why such a big drop? Because the company was right in the middle of moving in into the new facility. They had to run two locations at the same time, deal with extra handling and transfer costs, absorb the higher operating costs of the new building before all the equipment was up and running. So this margin drop is a transitional issue, not a structural one. Net income was a loss of $850,000. That is a reversal from $280,000 profit in Q1 of last year. The loss came from two things. The lower gross margin we just talked about plus interest expense almost tripled from $140,000 to $370,000. The higher interest is because the new lease for bigger facility now sits on the balance sheet under IFRS 16 and creates higher interest expense. So the message on slide three is pretty clear. Top line is still growing nicely. But profitability took a step back this quarter because of the facility move the next two or three quarters will tell us whether margins recover as planned. Moving on to the valuation. Uh, let me walk through the valuation on this slide. On the left side of the slide is the balance sheet. Cash is at $1.7 million. Total debt is $17 million. So the net debt is $16 million US. Add the net debt to the market cap and you get an enterprise value of around 50 $51 million US. On the right side of the of there are multiples uh of the income statement. Enterprise value to revenue is 1.1 time. Enterprise value to trailing twelve months. EBITDA is about 26 times the price to earnings ratio is not meaningful because the company is essentially in a net loss position. Below is the valuation table I added in context of Sonopta. Uh, Sonopta is a very useful proxy for the Fresh factory because it is in the same industry. Sonopta is a clean label, better for you company just like the fresh factory, only much bigger. In February 2026 a Dutch beverage co packer agreed to buy Sunopta in all in cash deal. The multiples refresco paid are very useful for a uh fresh factory. They paid around 13.1 times trailing adjusted Ebitda uh and on the revenue they paid around 1.35 times. So in comparison to Sinatra uh, uh takeover price, the company is not deeply undervalued. The real upside comes if EBITDA grows in line with revenue. Once the new facility is fully running, then the multiple compresses and the stock looks much cheaper. Moving on to the bull and bear case. Why someone might be um, bullish on this stock. First, revenue is accelerating up 37% in fiscal 25 and up 17% in Q1 of 26. This is real growth not slowing down. Um, second, uh, the new facility, the 154,000 square foot facility unlocks much more capacity. The margin pressure in 2025 and Q1 2026 was because they ran out of space, not because demand was weak. Third, adjusted EBITDA is reaching real scale. 3.3 million in fiscal 25 up 29%. The operating leverage is becoming visible. Fourth, sticky customer relationships. Contract manufacturing means multi year programs with co development and certifications. Customers cannot easily switch suppliers once those relationships are built. Fifth, insider conviction. The recent private placements which works out to be 90 cents to um, $1.50 per common share equivalent. That is well above today's 80% trade level. Insiders are paying more than the public price. And six, the secular tailwind. Uh, clean label, better for you structurally growing category. Emerging brands without their own factories are natural customer base for the fresh factory. Moving m on to the bear case. What could go wrong here? First, gross margin compression fiscal 2025 margin was 15.1% down from 17%. And Q1 fiscal 26 collapsed to 9% because of the facility move. We need to see if this recovers quickly. Second, the new facility is a big fixed cost commitment. The lease is $103,000 per month escalating 3.25% every year for next six years. This is a very long contract. Third, the lease liability on the balance sheet jump from almost $5 million at year end to 13.5 million under IFRS 16 recognition. The balance sheet looks more levered now. Fourth, Q1 2026 turned back to a loss $850,000 loss versus $300,000 of profit a year ago. And management has not given fiscal 26 guidance so we are flying blind. Fifth, there is a working capital deficit and asset based revolution. Culver is drawn 3.4 million out of 5 million dollar maximum. There is not of uh a lot of cushion left there. Sixth, customer concentration is not disclosed. We do not know what percentage of revenue comes from the top customer. Losing one mid sized customer could be very painful at this size. Seventh, tariffs and raw material inflation. The MDNA explicitly flags this is a margin risk and pricing pass through to customers always lacks. And 8 the stock is thinly traded. There are only 10.4 million shares outstanding in public float with very little to institutional ownership. Any forced selling could move the price significantly. What I'm watching going forward is four key signals to track from here. One, does the gross margin ever recovered in Q2 and Q3 as the facility move completes? Does the EBITDA margin uh get back to a 10% or higher once consolidated? Or do they even show the gap profitability this year or next year? Do they announce any new big customers this year? Or any customer concentration disclosure. And four, if they do another private placement, watch the price. Even sellers are paying above $1 per share. That is going to be a strong vote of confidence. Lastly, we do not own any UH shares.

Speaker A: The thing which just always concerns me with a UH contract manufacturer is the larger customers they have sway on you so they can push down your pricing for them. So even as you're scaling, yes you get scaling from your own cost, go down utilization of your equipment and staff and so on. But then you need to uh bid for these larger or attract these larger clients which they have pricing pressure on you likely at Least to a degree. So then that squeezes that operating leverage growth. So margins are just something that really need to be watched. I would say not even just in the short term, but in the length of this business or any other contract manufacturer. Yeah, yeah, no one. Just the other point I had was just the liquidity, just so people are aware is super, super low thousand shares traded today, so under a thousand dollars. So when you are looking at one of these stocks, you do need to actually have a proper illiquidity discount in place because likely on a day you, if you just feel like you need to sell where a panic happens, you won't be able to sell at least your full position. If you are building up a substantial position. More than a thousand dollars or $2,000.

Speaker C: Yeah, yeah.

Speaker B: And this isn't a comment on Fresh Factory specifically. No, I'm gonna make yours isn't either. But. Yeah, but um, like with um, contract manufacturers, sometimes they're a victim of their own success or the success of their company or the companies that they produce for if they get a real hit product that they are manufacturing. Um, or sometimes they move like if you're a smaller base, they can move out. They say, you know, we love you but we have to move to a more, a larger facility. So they can be a victim. Now if they can continue to expand, maybe they grow with their customers, which would be the ideal situation. So. But it is a risk. We've even seen that like with royalties, like uh, some royalty based financing companies, uh, their best royalties that are paying off over time, want to buy them out or get rid of them because they're a victim of their own success. So like it, it's not exactly like to like. But you can see that sometimes your most successful customers and then you, you know, on the royalty companies, they end up financing again the lesser companies. But I mean that's an aside that gets into a death spiral, but. All right, Brennan. Sorry.

Speaker C: Yeah, no, that's all good. All I was going to say is, you know, we've spoken with management before and you know, they think that there is a path to potentially, you know, adding on, uh, more lines, uh, getting on more customers, you know, getting up to potentially 100 million in revenue again. Ezra Hill went over, you know, the revenue growth story here has been quite. It's impressive, you know. It is exactly. It's impressive. You know, one thing that, you know, I think that, you know, profitability may not be the big focus right now from management. It is a land grab. Um, but you know, if their Margins can recover, as Rahel was mentioning and something that you definitely have to monitor here. You know that trailing, you know, EV to EBITDA multiple of like 26 times, probably, you know, much lower than that. But uh, but yeah, that's all.

Speaker B: Perhaps the end game is to get a acquired like Sonopta. Now Synopta I think have been around like 50 years or something. So it's, it's uh, far larger company but also just far longer history. But you know, it looks like um, uh, Fresh Factory is growing at a higher rate so then Synopta traditionally did. So it's good to see there. All right. I think that is going to end our show. I was, I regretted it. I was gonna say this at the start, but I was gonna shout out to a, uh, quick story. Um, I was up, uh, I have a cabin up a mountain around here and I was up there the other day and I was trying to haul something out of my car to bring it in and some guy, uh, from the cabin above yells down, do you need some help? I'm like, oh, fine, okay, yeah, that'd be great. And uh, him and his son came down and he says Ryan to me and I'm thinking, how do you know my name? And it was a client. I just actually spoken to him on the phone the week before. So there's millions of this province. I go up to get away from anybody and across the road is a client. So. And he, he helped me, um, bring out this picnic, uh, table that I was bringing out to the deck on the boat. So shout out. Thank you for the help. I really appreciated it. And it was a small world to see a client up on the mountain. I said to the guys, we, I'm going up there to get away from everyone. And he followed me. That's what I kidding. It was awesome to see him. But, uh, we'll end off the show there. I'm going to say if you're watching this right now on YouTube, smash that subscribe button. You're listening to this. Wherever you consume your podcast, rate and review us and always I'd like to wish you profitable investing. Thank you.

Speaker C: Thanks everyone.

Speaker A: Thank you. Thank you.

Speaker D: La.