The Next Big Canadian Tech Stock

In this article I will talk about the small cap tech stock that:

Has MORE new tech revenue than Intertainment Media

Is growing FAST just like Intertainment Media

Has less shares outstanding compared to Intertainment Media

And is priced at less than 5% of Intertainment Media’s stock price.

This stock trades at a mere $5-6 million market cap despite revenue of $1.7M last year, $1.3M of which was based upon their exciting new business which grew 124% from 2009. The company has been aggressively signing contracts this year and late last year, so there is potential to grow revenues much faster than that for 2011!

February 8th 2011. That day will go down in infamy with respect to TSX Venture small cap tech stocks. I like to call them the "Intertainment followers". Intertainment Media had just achieved its first peak at 96 cents after trading at 10 cents a few weeks prior to that. The fallout of this was that there were many TSX Venture tech stocks with similar characteristics riding the wave as people's attention on the Venture shifted from mining stocks to tech stocks. Let’s take a look at a chart summarizing the price performance of several stocks that day:

Company	Symbol	Open	High	Low	Close	Volume	Change	% Change
Intertainment Media	INT	0.960	0.960	0.610	0.790	45,689,219	0.070	9.72%
Poynt Corporation	PYN	0.250	0.275	0.230	0.230	23,458,214	0.005	2.22%
Digifonica Int	DIL	0.070	0.310	0.070	0.270	4,896,139	0.230	575.00%
Ipico	RFD	0.040	0.160	0.040	0.140	11,290,600	0.100	250.00%
Urodynamix Tech	URO	0.035	0.120	0.035	0.070	10,469,593	0.040	133.33%
Fireswirl Technologies	FSW	0.305	0.380	0.210	0.235	8,506,169	0.035	17.50%
Futura Loyalty Group	FUT	0.020	0.050	0.020	0.045	22,905,404	0.030	200.00%

FSW and PYN traded similarly to INT in that they had topped out early in the trading day on February 8th after a few days of insane gains. The others tried to pack weeks worth of fun into one day as a rumour had spread that DIL was connected to INT in some way. Traders scoured stocks that appeared similar to INT and started pouring money in. All of these stocks achieved 52 week highs on that day on abnormally high amounts of volume. Many of those highs still stand as their 52 week highs more than 3 months later. It was a great day for daytraders.

Since then, INT has become a household name for anyone who trades Venture stocks but it has struggled after breaching the $3 mark. FSW has had a few spikes up followed by periods of slow decline but overall has done well. PYN has drifted downward and while it has some good prospects vs Groupon, its share count of over 350 million has made it difficult to breach the 30 cent mark as that would put it at a market cap north of $100 million.

Then we get to the pump and dumps. RFD is gone. Bankrupt. Delisted. Worthless. DIL has since done a reverse split of 10 to 1 and is currently halted from trading. URO is a shell company that recently sold off its only business asset and sits at 2 cents with no clear direction and yet has the best prospects of these three.

That leaves one company left out of all the "Intertainment followers", FUT. Futura Loyalty. It shares some commonality with PYN in that its stock price has been fairly quiet since that infamous day. But unlike PYN it has less than half of the shares outstanding and unlike PYN, INT or FSW it does not rely on India, or China or any other third world country for revenue. It is growing, growing quickly and growing 100% in Canada. The market it's in is so underrepresented that it can achieve tremendous growth without having to think of leaving the borders for years to come. That being said, they are already working on a strategy to gain clients in the United States.

There is one company absent from this February 8th list and that is SelectCore (TSXV:SCG). The start of their impressive rise happened one day after on February 9th when their stock price ran from 5.5 cents then to over 70 earlier this month. The smart money was getting in on them while they were cheap and the chasers were getting in on the shell companies URO, DIL and RFD because of their heavy volume. Now the smart money is getting in on Futura while it is trading at a "SelectCore February 8th market cap" of under $6 million. Futura has been relatively quiet since February but in the last few weeks the price and volume have been picking up from a consistent supply of positive news releases regarding their business.

Click here for a detailed comparison of SCG to FUT vs the big players in their respective industries

What is Futura's target market? The broadest answer to this is any company that is not a monopoly and has to work to retain clients. Futura offers loyalty reward programs (either their own or Aeroplan miles) to retail businesses in Canada. The more specific answer to "What is Futura's target market?" is drivers in Canada.

Futura provides their loyalty services to well-known Canadian retailers like Active, Green & Ross, OK Tires, Speedy Auto Service, MAACO, and recently, an agreement with the Toronto Automobile Dealers Association has resulted in 23 new car dealers signing up for Futura loyalty programs thus far with a potential for over 300 more. Those businesses cover everything from car purchases to car maintenance and repair to tire services. The majority of people in Canada are drivers and will use those services extensively over their lifetime. If you're a driver, would you not like the idea of earning rewards points the next time you make a $20,000 new car purchase or $500 for new tires or getting something back for your next $1,000 car repair bill? And if you are already getting loyalty rewards for those services, well, Futura is very likely the company that is administering your program.

Futura also has a strong foothold in the pet supplies industry as they have an agreement with Pets Unlimited and PJ's Pets to provide loyalty programs. A full list of their Aeroplan and Futura Loyalty program partners can be seen here. Going through the list you can see that Futura is a dynamic company that is able to provide their loyalty programs to any number of retailers and industries, but is also able to dominate a category like they do with automobile services. If companies like Speedy or PJ's can achieve success in retaining clients through these programs, how long do you think it will take before Midas or PetSmart adopts them?

You can see an obvious benefit to a business plan focused on retaining customers for car dealerships, tire retailers and bodyshop repair. Canadian Tire dollars are such an ingrained piece of Canadian culture - everybody knows you collect them for every dollar you spend in a Canadian Tire store. Aeroplan miles (and Air Miles) are also an ingrained part of our society. Groupe Aeroplan has taken that simple concept and with that grew into a company with a $2.4 billion market cap. Futura is in the process of combining the two concepts brought forth with Canadian Tire money and Aeroplan miles for everything to do with cars.
Even if you don't see too much value in the loyalty rewards programs themselves, a careful read of their NR about signing 23 TADA dealers brings you this information:

""We are very excited about being able to leverage the Aeroplan program at our dealership," said Cynthia Cochrane, Controller Town + Country BMW / Mini Markham. "We see this as a great marketing tool that will help us attract new customers while at the same time retain and grow our business with existing customers. The flexibility and ease of focusing the program on specific areas of our business at particular times is very appealing."

Using Futura's robust, web based issuance and reporting module, dealers are able to launch the Aeroplan program soon after signing a contract. Futura has also developed a selection of point of sale marketing kits as well as a hands on staff training program making the entire process of launching Aeroplan simple and easy."

Signing up with Futura isn't just about companies being able to offer rewards programs to their customers, its about better tracking and understanding of their customers' needs. In my opinion, this is the more important function that Futura can offer to retailers. The Social Media craze that has led to Twitter and Facebook being valued in the multibillions and Intertainment Media in the hundreds of millions has one bottom line and that is all about getting to know your customer. Futura does the exact same thing but because they don't directly connect to hundreds of millions of people like the other companies do, their stock price is severly undervalued because they fly under the radar of the investing general public.

A potential concern for INT or SCG investors is that a bigger player could come in and directly compete with Ortsbo or the Iridium MasterCard market space. Because Futura is a sales agent for Aeroplan miles, Groupe Aeroplan does not have much incentive to compete in Futura's various niches as they already get compensated for Futura's work. They have essentially outsourced potential loyalty programs not already covered by them to Futura. Futura has this incredible advantage that a strong market player in loyalty rewards is on their side. Green Dot is definitely not on SelectCore's side and companies like Microsoft or Google may be Intertainment's best friend in a buyout scenario or worst enemy in a competitor scenario.

Click here to see how Futura compares to Intertainment Media in growth

Even if Futura achieves just 1% of Groupe Aeroplan's $2.4 billion market cap, that's $24 million, much higher than its current market cap of $5-6 million. And all indications are that they have potential to far exceed 1% of AER's market cap.

After reading all this you're probably wondering how is such an incredible company like Futura trading at 3-4 cents in the first place?

Well, there is a certain level of risk to it when looking at its balance sheet. Like INT, SCG and others, FUT is in the same boat with respect to having had negative equity as of the end of 2010. But even in that you can point out obvious goodness.

Referring to this article:

"The Futura Loyalty Group Inc. (TSX VENTURE:FUT) (the "Company") today announced that it has closed a shares for debt transaction whereby the Company issued a total of 160,571 common shares ("Debt Settlement Shares") at a deemed price of $0.05. This transaction is in connection with the conversion of $8,028.54 of accrued interest on certain convertible debentures described in a press release dated February 17, 2009 into common shares of the Company"

And to this one here:

"The Futura Loyalty Group Inc. (the "Company") (TSX VENTURE:FUT) today announced that it has secured $936,029 in financing commitments through a tax structured financing which was completed on December 31, 2010. $680,579 of the funds have been paid to the Company and the remaining $255,450 of the funds will be paid to the Company by March 31, 2011

The Company sold the Processing Division for $8,000,000, less transaction costs of approximately $245,000 in an arm's length transaction. The purchase price is comprised of $855,000 in cash to be paid in two installments of $679,500 on December 31, 2010 and $175,500 on March 31, 2011, and the remainder via promissory notes due December 31, 2018. The Company also received interest of $1,079 on December 31, 2010 and will receive additional interest of $79,950 on March 31, 2011. In addition, the Company is working to secure additional buyers for the promissory notes which may result in the Company securing additional working capital of up to $700,000 on or before March 31, 2011.

The Company has been granted the option to repurchase the Processing Division between January 15, 2012 and June 30, 2012 (the "Call Option Period")."

What does all this mean? Well the first article states that Futura issued 160K shares at a price of 5 cents to pay off some interest due on the debentures. The stock price around this time was 2.5-3.5 cents. Now why would the holder of the debentures be willing to exchange the debt for shares at such a high premium unless they were worth much more than 5 cents in that investor's opinion?

The second release is even more telling. They sold their processing division for $8 million but have an opportunity to buy it back in the first half of 2012 should they so choose. In the process they sorted out short term working capital issues and with the promissionary notes, improved their balance sheet.

All of this brilliant maneuvering was done to avoid dilution in the stock. As mentioned, only 160K shares were added to the share count in all of this. This is obviously a company that wishes to protect its shareholders and their interests. There are no millions of shares and warrants being added to the company's stock a few weeks before the company turns viral like in the case of Intertainment.

Do you appreciate loyalty rewards programs?
Do you drive or own pets?
Do you think companies will value a tool that can better track and retain customers?
Do you like companies with an aggressive growth strategy in Canada?
Do you like companies that intelligently use finance options to avoid shareholder dilution and have clear debenture holder support?

If the answer is yes to any of these, you might consider FUT as an investment within your small-cap portfolio.