OneSoft Solutions Reprofile - $OSS.v

Reprofile of a long time holding

The last time I profiled OneSoft Solutions, OSS,  was way back in 2020. Crazy how fast time flies. I thought it was a good time to reprofile the company.

This is my only real “disruptor” stock. I have other software companies, but this has been my one and only company that has never demonstrated consistent profitability. I’ve added and trimmed as it fluctuated, but have held some sort of position since 2017. To be a holder for this long demonstrates how little I change my portfolio. 

Price: $0.66 CAD

Shares: 122 million

Market Cap: 80.6 million CAD

Enterprise Value: 72.6 million CAD

1 year performance: +29%

TLDR

OneSoft provides SaaS solutions to the oil and gas pipeline industry. They offer CIM (Cognitive Integrity Management) as the core solution and add on modules to scale their value add and pricing. OneSoft has not lost a customer due to traditional churn since they  landed them. Their initial TAM is pipes that have to be “pigged”, which is a process mandated by PHMSA (Pipeline and Hazardous Materials Safety Administration). This equates to about 660,000 miles of pipe in the US of a total 2.7 million miles.. OneSoft is introducing new modules as we speak and over the next year this will increase the TAM by at least 3x and address the pipe that is not “piggable”. Additionally, OneSoft is a  first mover and the company, currently, does not have significant (or really) any competition. Sales cycles are very long, and many late adopters are still quite reluctant to take the plunge and migrate over to CIM. This only adds to the stickiness of the business. 

Background

OSS sold off their payroll and HR software (Serenic) and returned capital to shareholders in 2014. On July 17, 2015, the Company acquired the business of Bridge Solutions Inc. (“Bridge”), a private Alberta company. Bridge had developed technology that allowed pipeline operators to optimize their infrastructure management and to identify potential threats to a pipeline’s integrity. OneSoft, through a new subsidiary, OneBridge Solutions Inc., (“OneBridge”) acquired all rights,  title  and  interest in and to the Bridge intellectual properties for an acquisition price of $818,077.

The Industry

Pipeline operators consist of all sizes of businesses. They may be a small operator with a small number of miles, or the pipeline may be part of a large energy business with all sorts of exposure to the overall sector. 

There are approximately 660,000 miles of pipe in the US that are “piggable”, and  a total of 2.7 million miles of pipe in the US. “Pigging” is when a company uses a Pipeline Inspection Gauge (PIG) to capture data for analysis. The operator will send down a cleaning pig or “dumb-pig” before sending down the more sophisticated “smart-pig” that is equipped with an array of sensors. The Pipeline and Hazardous Materials Safety Administration (PHMSA) mandates that a specific pipe has to be inspected using in-line-inspection (ILI) or pigged every 5 or 7 years. 

Here is a helpful video. 

OSS realized the potential for this market to be disrupted, as the industry relied heavily on internal resources manually combing over spreadsheet data. I was originally drawn to the company in 2017, when  an associate of mine confirmed that a multi-billion-dollar Canadian company was still using a team of engineers to analyze pig data rather than machine learning. The data was collected and dumped into excel. where an in-house team of engineers would attempt to analyze it and help determine where to deploy the company’s traditional in field monitoring, ongoing maintenance expense, and any emergency repairs (which require unscheduled stoppage).

Obviously the cost of a spill is very expensive, both in absolute terms and the resulting political ramifications. In today's culture, I would not want to own a pipe that develops a leak. 

MSFT Accelerator and CIM

OSS was one of the first companies in the MSFT Accelerator program, as MSFT was early to realize the value of recurring cloud-based revenue. 

In December 2015, OneBridge was selected by Microsoft Accelerator as one of nine companies from 721 applicants from 50 countries to participate in Microsoft’s first Accelerator program to focus on Machine Learning, Data Sciences and Big Data. Accelerator took place in Seattle from February 2016 to June 2016, whereby they fast‐tracked the design and development of their products.  Microsoft’s decision to support and invest in the OneBridge project (equivalent to approximately USD $600,000 of non‐repayable grants) has been highly valuable to date and it is believed to have provided great credibility to OneBridge’s strategies. They have stated that they believe this gave them a 2-3 year head start on any competition. They remain closely linked to Microsoft, continuing to actively work with their sales teams and engage with their product development teams regarding Microsoft Azure, Machine Learning and Business Intelligence reporting.

Here is a description of CIM from their filings:

Cognitive Integrity Management (“CIM”) software uses big data, machine learning and other data science components to assist pipeline companies to reduce or potentially predict pipeline failures. Components of Microsoft’s cloud platform and services have been incorporated to create what we believe is cutting‐edge software capable of detecting and potentially predicting pipeline failures, through advanced analysis of historical pipeline inspection data.  

The CIM product was commercially released in January 2017 after which commercial marketing commenced to induce prospective customers to purchase subscriptions to use the product. They continue to develop CIM and to add features and innovations which its customers believe would enhance the utility of the product. 

What does OSS make/sell or What sets them apart?

The initial win for them is getting the customer to adopt CIM and transfer the inhouse risk analysis to OSS’s more sophisticated offering. Once the client has ingested data into the model, the value proposition is quite clear. Having said that, there were few early adopters (namely Phillips 66) and we have only now started to reach the scale to where OSS is not burning cash. Despite the value proposition, the industry is very slow moving as legacy processes are hard to change. 

They regularly involve industry participants in trials of new modules during MVP (minimum viable product) before a broader commercialization. This helps ensure the functionality as well speeds up adoption in the slow-moving industry. 

Some business highlights

• The business currently sports gross margins near 80%.

• Revenue growth has been very high from their original low base. They are expected to continue to grow revenue at high rates (25%+) moving forward. 

• The company has recently made it to EBITDA breakeven (ish). The cash burn is essentially zero at this revenue level. 

• As mentioned, they have not lost a customer once they have signed up. Any “churn” has been due to another company purchasing one of their customers. 

• There is no significant competition at this point.

• Given the high impact of pipeline spills there is a large regulatory pressure looming on the industry, which will be a tailwind for OSS.

• As it stands now, about 150k or the 660k total piggable pipe is under SaaS agreements with OneBridge. 

OSS has pivoted a few times on their pricing strategy. If my memory serves me correctly, they started with the expectation that this would just be a flat fee per mile of pipe ingested, then layer on top the additional features. They have moved to a minimum fee, plus a per use add on. I, personally, do think this will continue to evolve as the business grows.

TAM

It is worth emphasizing that the business is extremely sticky. At this point, they are the leader and have continued to build out their offering. As they continue to deploy additional modules, they will increase their revenue and the revenue per mile of pipe ingested. The modules aimed to address the non-piggable pipe is a huge win. The next modules to address the non-piggable pipe is the External Corrosion and Risk. 

In their investor presentation from Q4 2023 they shared this slide with investors which goes into more detail on the TAM as they see it currently.

As you can see the core CIM has been developed and is commercially available. The External Corrosion and Risk modules are key to unlocking the non-piggable miles and expanding their TAM. 

They have not shied away from adding in critical human capital via M&A as the opportunity presents itself. I do see this continuing as they had some extra fees in Q1 2024 related to an M&A deal. 

Something I haven’t seen mentioned regarding OSS is the implementation of their platform on similar applications. Years ago, they were investigating sewage pipe analysis and rail ties. Though it looks like they have not spent much time exploring this recently, this does provide additional upside. 

Balance Sheet

The balance sheet is in good shape. 

Given the year is front loaded with unearned revenue from customers, this leads to a cash balance at the start of the year which is higher than the end of the year. For instance, at the end of Q1 2024 it showed them with 8.0 million of cash. However, in my mind they really have about 5 million in net cash given the working capital swings. It is similar to the guidance they put out earlier this year. It may not be the right way to look at it, but it is how I’m looking at it. 

Here is the guidance they gave after Q1 2024.

They are at least EBITDA breakeven, thus I do not see them needing to eat into the cash pile here. 

Share Structure & Ownership

There are 122 diluted shares out. As with most software companies, they are not afraid to issue options. There is a 1-2% expected dilution from options for me. 

The CEO owns about 8.5% of the common. The Chair owns 1.7% of the common. 

I, unfortunately, can’t find much information on institutional owners. TIKR has the Spartan Fund Management listed as owning about 2 million shares but this only amounts to a 0.50% position or essentially a rounding error. Seven Canyons Advisors also owns 1.5 million shares, which works out to a 1.1% position for them too. Though I’m not concentrated heavily in OSS, I wouldn’t write up anything less than 3% of my portfolio. 

OSS took advantage of a high share price and raised equity in 2019 at 0.80. The share price went from 0.30 to almost 1.00 in 2 years. There were no warrants with the raise. I think this deal was executed well. 

Management & Compensation

The key management that I have met over the years have been the CEO, CFO, COO and President of OneBridge. Together they own a bit over 10% of the common. 

Compensation is reasonable in my mind for a company that wasn’t generating cash. They have an Omnibus plan that has a rolling up to 10% security based compensation. 

Executives were granted 300,000 in options in 2023 exercisable at $0.50. Brandon Taylor (Pres OneBridge) was granted 1 million RSUs at $0.75.

Board

The board is comprised of 4 members, with 3 of them being independent (Doug Thomson, David Webster and Nizar Somji). Doug Thomson is the chair and has been on the board since 2010. Thomson owns over 2 million shares, but the others only own 2,500. To me, this is way too low especially as I own more than 2,500 shares. Personally, I feel the other board members should put some of their money in the business via open market purchases. 

The directors have been compensated via retainer and options. The two independent directors were given 20-30k in cash and the chair was given 50k. Directors are also given options at $0.50. 50% of the options vest on the date of grant and 50% on the one-year anniversary. The total amount of options issued to the 3 directors was 400,000 in 2023.

Risks

As with every investment, there are risks. I have identified several risks  and will speak to how I think about each one.

• Blunt force dilution. 

  • I think this is a low probability but a serious risk. This is a software company after all and though they may not need to, I can see them doing a raise to grow the business if the market gives them the multiple for doing so. The good news with this scenario is that I would expect the share price to have a big run before this happens. 

• Dilution via a thousand cuts. 

  • This is more plausible to me. They have offered some equity in the business as they have added specific features or human capital (or both) via acquisition. Additionally,  there are always the ongoing stock options each year. This may not move the needle much in the short term but if you are planning on holding OSS for 3-5 years, I think this is something you need to take into account. 

• We are going to stop using oil.

  • Sorry, this is not likely. The pipes have been built and our dependence is at best, flat. Despite the headlines, using pipe to transport oil and its derivatives is substantially cheaper and safer than other modes. Having said that, in the cancel culture world anything related to hydrocarbons may get shunned.

• Competition.

  • Though I feel they are years ahead of the competition, that doesn’t mean I shouldn’t be mindful of the future and if someone can provide something similar. 

• Low adoption of new modules. 

  • Though I don’t think this is a risk to the business, I do think it’s a risk to the stock. If the roll out of recent modules aimed at the larger non-piggable pipe does not get the adoption they desire, we could be looking at lower revenue growth which would hit the stock hard (IMO).

• Venture Listing

  • I think there is a chance that this business won’t get the value it deserves as long as it is listed on the Venture. There are many institutions that can’t own anything listed on the TSX Venture (and for good reason). Thus I think it’s not a business risk per se, but a risk to the investment working out. 

• Going Private Too Early.

  • This may not seem like a risk, but I think it’s something to be mindful of. They are really hitting their stride on the adoption curve. In 5 years time, this could be a dramatically different business. Going private today with a small premium would be a missed opportunity in my mind. 

• Distractions to key personnel. 

  • I mentioned before  they were once investigating using their technology to investigate sewage pipes. Yes, I want them to grow and investigate other applications but there is a balance between growth and profitability at scale in my mind. The market may or may not like side quests. 

Valuation

During the Q1 2024 call, they reaffirmed the guidance issued at Q4 2023. OSS is expecting 15-16 million in revenue this year, which includes a small amount of new customer pipes that they are confident they will win. This puts them around 4.5x EV/Revenues. Looking forward to 2025, I have them at 3.2x EV/Revenues. 

They guided for 1.5-1.6 million in adjusted EBITDA. Since the business was just breaking even and had a large growth runway, I don’t believe looking at EBITDA multiples adds much value. 

I am not sure how much it would cost to start from zero and get to this scale in the industry, given the slow adoption of new technologies, but I reckon it is quite a bit more than the current market cap of the company.

Q1 2024

Q1 2024 came in a bit softer than I was expecting. They went over the explanation in the conference call, reaffirming guidance and confirming the schedule for the next two modules. I won’t go into more detail here. We are close to getting a peak at Q2 2024.

Closing Thoughts

This is probably the best small company that I have come across with disclosures and information in their MD&A. Given that they are still listed on the TSX venture and haven’t needed capital in over 5 years, I am used to much less.. 

They have yet to make meaningful inroads internationally but recently, they announced their first international customer . This is a big win for the business despite the amount of pipe outside the US being smaller than within US borders. 

The company has come a long way. They have had some learnings with pricing, which I’m still certain they will adapt as needed, and some distractions along the way. As they grew, they developed a better way of getting customer feedback to improve their product, without sacrificing valuable resources and chasing “one-off” improvements for a specific client. 

Thanks for reading. 

Dean

*long OSS.v at time of writing