CA - OneSoft Solutions Emerging As A Disruptor

Summary

• OneSoft preannounced strong numbers for fiscal 2022.
• Guidance for fiscal 2023 calls for the growth rate to remain on pace.
• Management sees a path to profitability.
• The company is preparing to uplist its shares.

OneSoft Solutions ( OTCQB:OSSIF ) applies A.I. and machine learning to provide pipeline integrity management to the O&G industry. The company's data library is unlikely ever to be equaled or rivaled, and to the best of my knowledge, no faults have occurred in any pipeline managed by OSS.

This is a follow-up to my previous articles on the company ( 1 , 2 , 3 , 4, 5 ). The previous one was published in June 2021. The stock price is about 20% lower now, but the fundamental picture has improved. Like other investors, I concluded that it is just a matter of time before this company takes a dominant or exclusive portion of the market share in its industry. The company's recent press release provided forward guidance and color to suggest that the company is starting to kick into high gear.

Gaining market share dominance

The O&G pipeline integrity management industry is fragmented and controlled by numerous small and large companies providing legacy services by employing engineering teams to review pipeline data by hand. The legacy process results in the majority of data not being reviewed and an alarming accident rate.

I've been monitoring OSS's ability to capture market share. In my first OSS article, I said that the legacy O&G pipeline integrity providers would have to become OSS customers to remain in business, but that hasn't happened yet. If you look at O&G pipeline integrity industry outlooks , OSS isn't ever included in the list of market leaders. But the landscape is changing due to advanced technology and growth, with the industry TAM projected to exceed $2 billion. O&G pipeline operators have been slow to accept digital solutions but are being prompted to move along by the reported success that OSS has achieved, increased oversight from environmental agencies, and security issues. OSS stores data in the cloud, which presents protection from ransomware.

O&G pipeline operators tend to employ numerous legacy pipeline integrity providers, with each legacy provider maintaining their own system for record-keeping and data storage. It is an ordeal for these operators and OSS to coordinate the transfer and downloading of this mish-mash of information. Nevertheless, it must be overcome if the company is to gain market share. Management is aware of this challenge and stated in the press release cited above:

Based on discussions currently underway, we anticipate that the Company will enter collaborative arrangements in Fiscal 2023 with certain industry vendors who may choose to use our solutions rather than continue with their legacy systems or commence development of competing products.

The strategy to overtake the legacy O&G pipeline integrity companies has already seen results, as the company acquired a large legacy company a few months ago. I had been waiting for this type of activity to commence and now to accelerate.

Revenue drivers

Revenues for fiscal 2022 are expected to be a 55% Y/Y improvement over the prior year. Guidance for 2023 is for the growth pace to continue at a rate approaching 50% and revenues to exceed $10 million compared to $6.9 million for 2022. Forward guidance includes breaking even on the present cash position of about $4 million, which means the company is closing in on profitability and a capital raise is unlikely unless needed for acquisitions. The forward guidance does not include revenue from expected deals with legacy companies.

Most of the revenue is derived from pipeline integrity services from the company's Cognitive Integrity Management SaaS solution ("CIM" The company revealed for the first time in a few years the number of pipeline miles under contract and that 46% of these pipelines were income-producing during 2022. Regulations call for an increased percentage of total pipeline inspection for each pipeline operator, which is expected to result in 57% of the customer pipelines producing income in 2023.

Management is anticipating that $900 K will be added in revenue from new customers. New contracts will include higher pricing, which has been suggested by my readers and discussed on internet boards. One of OSS' largest customers, Phillips 66, acquired additional pipeline, which is also expected to add to OSS revenue.

New products are expected to add to revenue in subsequent years as cited in the press release:

Management is forecasting limited revenue generation from Corrosion (which MVP was completed in Fiscal 2022), Risk and Crack Management modules in Fiscal 2023, with the expectation that material revenues from these modules will not commence until Fiscal 2024. A new module with functionality designed for geohazard risk management is in early research and prototyping phases.

Uplisting

A strengthening of the board of directors is planned by adding O&G industry experts, which has been much needed per comments made on my previous article and what I've read posts on internet investor boards. It is pleasing to see that the company is responding to investor concerns, but it is also likely that the company is setting up to meet uplisting requirements, which it is also doing in its financial reporting enhancements.

Financials

There are 121 million shares. The market cap is $45 million. The company last reported $4 million in cash and no debt. The enterprise value is $41 million. As the company scales, the financial ratios look more reasonable compared to its historical numbers. The EV/S ratio is just 4X (41/10), which is very attractive for a fast-growth stock, particularly if it is profitable in this market climate. I expect we will see additional revenue than the $10 million guidance as we see legacy providers join rank with OSS in one way or the other.

Risks

Management has been deliberate in negotiating contracts not to take on the responsibility for the costs involved in a pipeline failure accident. However, such an event occurring on the managed pipeline would adversely affect the stock price. Dependency on oil and gas has declined as a percentage used for total energy production, but the demand for energy has increased. The company's current product line implies that the company's future prospects are dependent on oil and gas pipeline usage.

Conclusion

OSS reported solid growth for fiscal 2022 and provided a pleasant outlook for fiscal 2023, including a path to profitability and market share dominance. The company seems to consider investors' concerns as it plans to increase prices, boost its board of directors and directly take on the legacy providers. I remain bullish on the company's ability to overtake competitors and dominate its industry.

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