- Part 1 of this series reviewed recent share price activity.
- PTE went from ~ $0.20 to $1.50 – and back again as of May 2018.
- Recent revenue misses have caused massive selling pressure.
- However, balance sheet is rock solid, with no insolvency risk.
- Investment thesis boils down to one issue: can PTE increase sales.
In Part 1 of our review, we took a look at the activity of Pioneering common shares from 2016 through to May of 2018, and how they came to run from under $.20 to a high of $1.50 – and back. In this segment, we take a look at how good (or bad) the company is today, after having given up virtually all of its gains over the last few years. Essentially , is the company worse today than it was yesterday ?
To answer this question, we look first at the most recent financial statements of Pioneering (6 months up to March 31 2018) versus the financials immediately before the February 2017 financing (Audited 2016), beginning with the balance sheet:
Using the basic share count, what becomes clear from this comparison is that the company today is debt free and has ~ $0.12/ share in cash and short term investments. Before the financing, Pioneering had $1.3 MM in long term debt and had only $0.07/share in cash. Additionally, the 23.6 current ratio today is significantly improved over the current ratio of 1.47 of December 2016. In terms of potential bankruptcy risk and capital structure, the company is in a much better position today.
This being said, any rational investor would question how long cash reserves can last. Based on the most recent 6 month period (October 01 2017 – March 31 2018) & 3 month period (Jan 01 2018 – March 31 2018) we can see that Pioneering burned $0.954 MM & $1.284 MM respectively, including all changes in working capital. While we don’t know which one of these is indicative of the future, we can assume that the future cash burn could be anywhere between $428,000 / month (using the 3 month value), or as low as $159,000 / month (using the 6 month value), or an average of $293,500 per month.
Now that we have an understanding of what the cash burn looks like, if we then assume that Pioneering continues to sell at these depressed levels, then the company could continue to operate, without requiring incremental financing, for somewhere between 16 months ($6.8 MM / $428,000) and 43 months ($6.8 MM / $159,000). In essence, both the balance sheet and the cash flow statement confirm that insolvency risk is not an issue, and that dilution via further share issuance is unlikely in the near future.
While a clean balance sheet and cash in the bank are always nice to have, we should also take a look at the income statement to understand how revenues and expenses have changed over this period of time (below).
At first glance, a few things are immediately apparent. Gross margins have deteriorated, from an average of 66% in 2015 and 2016 versus a significantly lower 52%-53% in 2018. While this is clearly “not good”, gross margins of over 50% are still very robust. It is possible that a significant portion of this deterioration is attributable to the move to large distributors (Wilmar, HD Supply, & Staples), as larger distributors may agree to purchase larger volumes, but at a somewhat reduced price. With this in mind, we will assume the lower gross margins are here to stay. Additionally, one can see that G&A costs have increased significantly, from full year 2016 costs of $3.39 MM to forecast 2018 costs of between $5.9 MM to $6.5 MM.
The increase in costs are not entirely unexpected. We should recall that the companies push into the (very large) US market is a fairly new development, and significantly increases their exposure – and potential sales. As the saying goes, “there is no free lunch”, and it is reasonable to expect some increase in G&A to go along with the anticipated increase in future sales. Additionally, some of the G&A costs noted for both 2016 and YTD 2018 include non-cash charges. We are not referring to DD&A, as these costs are less than $30,000 annually. Rather, we are referring to non-cash compensation expenses that are buried in other G&A line items. Extracts from the notes to the financial statements (below) show the total non-cash charges for each period:
Adjusting for these values, this means that actual cash costs for fiscal 2016 and YTD 2018 come in at $2.80 MM and $2.34 MM respectively. If we then assume that the $614,472 of non-cash costs for the first 6 months of 2018 were evenly distributed throughout the 6 month period, we can then annualize both 6 month and 3 month G&A costs, which gives us a full year estimate for 2018 of somewhere between $4.69 MM and $5.30 MM.
So, after review of all available financial information, we can make the following assertions:
- Balance sheet has been de-risked, with significant cash on hand and no long term debt.
- Company has no insolvency risk, and should not require a capital raise for some time.
- Company can operate at current “depressed” sales level for 16 to 43 months.
- Gross margin has deteriorated from ~ 66% to ~ 52%.
- Some of this deterioration may be explained by the move to larger distributors.
- G&A is significantly higher, even after adjusting for all non-cash charges.
- However, this too may be a function of the company adjusting cost structure for larger future sales volumes.
While it is clear that PTE shares won’t be hitting $0.00 soon, our original question is only 1/2 answered. While insolvency is a non-issue, & the balance sheet is significantly improved, the income statement appears to be “less improved” at the very least, if not worse. We are still left wondering, is this glass half full, or half empty ?
To answer this question, we first have to determine if Pioneering will be able to actually sell increased Smart Burner volumes, and if so, when. This is perhaps the key to the PTE story, and this is exactly what we will discuss in Part 3.