Earlier this year I posted an item on Active Control Technologies after it had, after two years, finally secured certification by the Mine Health and Safety Administration (MSHA), otherwise known on Bay Street as "emshaw", to deploy its wireless system in American coal mines.The title was Active Control Technology (ACT.V): Rubber Hits Road and the note was upbeat but cautionary. The gist of the post was this: the Company has lots of potential, but it needs to execute well in the short-term to leverage potential. Management had communicated to analysts that it had $6 million in contracted backlog ready to immediately convert upon MSHA approvals and that it had a qualified pipeline in excess of $20 million. It set an expectation that the company was about to transform from a speculative promise to a high growth company that was not far away from actual earnings. This was six months ago.
What has happened in the intervening six months? Nearly nothing. The rubber hit the road and ACT was nowhere to be found. Since its potentially transformative MSHA announcement, management has spent most of the time shoring up its diminishing working capital while it waits for contracts...and waits. In retrospect, the $6 million backlog that was communicated to the street was either not well understood, or simply unrealistic. The persistent over-promise throughout the last couple of years may have finally caught up to the CEO.
Earlier this week, the Company announced that Steve Barrett is being sidelined to Executive Chairman of the Board (what is that?) and Cameron Sturgess is promoted to CEO and President. This is always a sign of struggle. In addition, it was announced today that Paradigm has filed a short-form prospectus on behalf of the company to raise more equity. The amount of capital sought is possibly in the $7 million to $10 million range, which raises the specter of significantly more dilution for current shareholders. The increase in working capital should reduce some of the perceived financial risk that may be delaying buying decisions, although there are no guarantees that potential buyers will pull the trigger.
Apparently, there are some contract announcements "coming soon", although that has been a mantra at ACT for many months, and investors will likely have difficulty believing without seeing. The credibility of the new CEO hinges upon exceeding the promise.
Longstanding shareholders may see a glimmer of hope in the quality of technology developed to date, and in the fact that the Company has a couple of very happy reference clients including Patriot Coal (NYSE:PCX). Although, this is cold comfort in the face of more dilution and yet more delays to cash flow as the company resets.
The bottom line is this: unfortunately, ACT was unable to execute effectively at a crucial point in its evolution which means that it has to go through the reset that it is now undertaking. Resetting the company is, by no means, guaranteed to be successful. However, if it is able to re-capitalize and execute better with new management, ACT may be able to regain some momentum lost. But this could take a while. In the end, its all about execution and ACT has a lot to prove to gain the confidence of investors as it goes forward.
Disclosure: I own shares of ACT, I do not own shares of PCX.