On Monday, we wrote a bullish piece about ImagineAR Inc. (IP.CN) (IPNFF) after it announced a $10 million deal that makes it significantly undervalued at current prices and may be just the first step in a new era for the company. Unfortunately, instead of rising to something close to our targets, it has taken a severe drop to $0.075. Legacy shareholders must have taken an opportunity to exit at low prices because they figured this deal will be like the previous ones that have fallen apart. We find this price action unacceptable and did some digging - including with representatives of the company - to assure our readers that this situation is very different from deals of the past. If you like our picks you can follow this blog by clicking the follow button on the top of the left hand panel. We have 1031 followers on here as well as 121 followers on our Canadian blog. You can also follow us on X @StockTradePicks which has over 5,000 followers.
As we mentioned in our first write up, we have been aware of ImagineAR for a while and know of its past failures. There are good reasons why we never mentioned this company before and treated as more of a small swing trading opportunity than investment until now. Today we are fully invested as the technology looks ready to be adopted by serious players, the business model has been adjusted to a capex and opex light one so financing and dilution is much less of a concern, and we are optimistic that the patent infringement case will land in the company's favour in a reasonable time frame. As we weren't shareholders at the time, we didn't pay for lessons learned in the past. However, these past mistakes are causing an overhang on the stock price today as legacy shareholders who don't recognize the new reality look to exit. While this is frustrating for us in the near term, it presents a good buying opportunity for those willing to wait until that overhang is absorbed by the market.
The main criticism of this deal comes from its similarities to a deal announced in June 2023. That project was slated to go live in the Q4 2024 which has obviously not happened. It was an ambitious plan to develop a 50,000 square foot immersive entertainment center but unforeseen circumstances regarding the economic landscape caused the project to not proceed as originally envisioned. The business model included a shared capital expenditure and operational expense structure. The model was too broad and presented significant risks for a small company with limited resources, leading to a reevaluation of the company’s direction. We think the company downplayed the challenges of this deal in the press release, which has led to the valid criticism it has received today. But it has since learned some valuable lessons around focusing on its strengths, using its capital wisely and increasing transparency to the market. This included company representatives having a discussion with us to clarify what went wrong in the past and why it won't happen again in the future.
The deal in June 2023 was predicated on IP's participation in acquiring a property on which the immersive entertainment center was to be built. This included Director Gary Panaich and another unnamed individual fronting $250,000 each as a deposit for the acquisition of land (link). They were reimbursed by the company in the form of shares at $0.05. The company was giving it an honest try, but was unable to secure the land and the deal did not proceed. A side note - the progress report dated November 2023 states the company had 264 million shares outstanding. It now has 277 million shares outstanding, 5% dilution in 15 months. Among the lessons that IP has learned, it's to respect shareholders and significantly slow down its rate of share dilution.
Since then, ImagineAR has refined its strategic approach, transitioning toward a more sustainable and scalable business model. This evolution is exemplified by the company’s new partnership in Niagara Falls, a pivotal step forward in its growth journey. People misunderstood or downplayed the press release from two weeks ago as fluff, but it was outlining the changing strategic direction of the company. The Niagara Falls deal puts these concepts into action. IP is not a builder nor financier of entertainment complexes. It's a tech company that will launch its technology to create engaging and novel experiences for people in buildings that were built and paid for by someone else.
The Niagara Falls partnership requires no capital investment from IP, significantly reducing financial risk compared to the 2023 deal. Additionally, the company will not bear any operational expenses, allowing it to focus on its core strength - delivering cutting-edge augmented reality technology. Rather than managing the entire facility, ImagineAR’s role is now centered on providing its advanced AR platform and expertise, ensuring the highest quality user experiences. Niagara Falls, one of the world’s top tourist destinations, attracts millions of visitors annually, providing a significant audience for ImagineAR’s innovative AR experiences. This partnership allows the company to showcase its technology in a high-traffic environment, enhancing brand exposure and market recognition.
This new partnership is a testament to ImagineAR’s ability to adapt and thrive in a dynamic market. The company has shifted towards a licensing model, ensuring recurring revenue while mitigating financial risk. ImagineAR has demonstrated agility in refining its business model and learning from past experiences. The new business approach is financially sound, focusing on innovation and reducing operational risk. The Niagara Falls partnership positions ImagineAR for long-term growth and market expansion, with potential for increased valuation by focusing on its core competency - augmented reality technology.
While the site must be built, the major difference between this situation and the previous one is that the business partner actually owns the land and will bear the costs of development. Not only is IP not responsible to procure the land and build the center, land procurement and development is already settled. The division of responsibility is set and doesn't represent a risk to the project as in the case with the 2023 deal. It's one thing to say that IP isn't responsible for getting the land but "someone else" is and another to say that the "someone else" has already settled the issue.
The next thing we would like to do is to compare the Niagara Falls press release to the one released in 2023 to show that IP has learned some lessons around transparency and respect for shareholders in garnering a superior deal:
- The Niagara Falls release explicitly stated that J Grewal is the owner of the location for the proposed Immersive Center. The 2023 press release did not make it clear that purchasing land of a suitable size and location for the project was a significant prerequisite to the deal being completed.
- The Niagara Falls deal came with a $250,000 deposit already paid to the company. The 2023 deal did not. Should for whatever reason this deal fall apart, at least it generated revenue to the point that this would be one of the best quarters the company ever had.
- The Niagara Falls deal clearly stated that this is a $10 million contract upon completion of the site plus recurring annual future revenue. The 2023 deal made no reference to specific contract amount or revenue opportunity. The ability to even mention a number and get it past regulators shows that this is a far clearer and more robust deal with signed contracts backing it.
- The 2023 deal was predicated on a $2 million financing raised by the partner plus IP giving up 49% of its FameDays subsidiary. The Niagara Falls deal has no such financing requirement and the business partner is not taking any equity and not diluting shareholders. There is no $2 million financing or any strategic investment needed because the developer is the one responsible for bearing the costs of the build, not IP. Note also that FameDays is still wholly owned by IP as the 2023 deal failed.
- The Niagara Falls deal makes reference to 2025 rollout as opposed to the 2023 deal that specified a fall/winter 2024 timeline for it to be open to the public. This rollout term is a fairer representation of the timeline as building timelines can be unpredictable. As long as progress has been made during the year in the development of the location, this rollout term is accurate even if it's not quite ready to be opened to the public in 2025.
In our opinion, the 2023 press release was promotional in nature while the Niagara Falls press release is much more substantive in nature. Naysayers and trolls mock that the company had to release a continuous disclosure review a few weeks ago that required several restatements to IP's financials. Smarter investors know that this is actually a sign that the company is under a microscope and releases will be picked through with a fine-tooth comb by regulators. Not only has the company learned from past mistakes, it MUST learn from those mistakes if it wants to overcome regulator focus. That past press release isn't an indicator of increased risk by investing in IP. It's an indicator of decreased future risk because company management can't afford actions that keep it on the radar of the regulators.
One final criticism of the release that we find laughable (especially in the context of the paragraph above) but have to address is related to the presentation of IP's business partner, Mr. J Grewal, in the press release. We have been assured that the man is real and has significant real estate assets across Ontario. His name is also very common so it's easy to mix him up with others when doing research. Imagine trying to find information on "John Smith" versus "Jon Smith", for example. The situation is similar here. IP provided sufficient evidence to the regulators to assure them that this is a legitimate deal in order to get the press release approved in the first place. The man is a real estate developer, not a penny stock investor. Leave him in peace so he can focus on developing the project to the benefit of all IP investors.
P.S. We expect this developer, among others, to be very happy with the expected re-election of Doug Ford in today's Ontario election. For shareholders in that province or who are otherwise familiar with Ontario's politics, they should be able to put two and two together here. For those unfamiliar, there has been controversy about the development of a spa and protected farmland potentially being used for highway and housing development in the province. Developers like Grewal and the Niagara Falls project (as well as future sites) represent the flip side of a government having very pro-development policies. These type of deals are very much aligned with the goals of Ontario's politicians in power. IP has procured the right partnership in the right location at the right time.
Disclosure: We are long IP.CN
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