Pioneering Technologies: Post Mortem?

For those of you that have been following this story, you have either thrown in the towel, or are curious as to whether or not this company is alive (or not). Since publishing the initial four part series back in June of 2018, the share price of Pioneering has managed to shed even more value. Anyone that purchased in June of 2018 (or prior to Q3) has lost money, and in no small measure.

Recently I received an email which was basically a “what now” kind of query. Which is why I am following up with this post. For ease of reading, and so that readers can skip to those areas that are of particular interest to them, I’ve decided to follow a point form format. Here goes….

Are you (Grey Swan) still long on PTE, and have you purchased more ? Yes, I am still long, and I have (at these prices) purchased more.

OK. You are still long, and have bought more. Are you insane? That depends on how you view your investment horizon. I tend to have a long hold period (less than 2 years is very short for me), and have held things as long as 10+ years. My most successful investment spanned an 8 year period. During that time, depending on when I might have sold, I could have lost ~ 65%. When I did eventually sell, I ended with a 1200% gain on the entire position, and that was before the shares peaked. The final tranche of shares that I sold realized a gain of 2600%. All that is to say that I am “crazy” by the standards of those who have short investment horizons, but perhaps not crazy for those that have long time horizons.

Why did I buy more shares ? The company is, without a doubt, missing short term revenue targets, and the market is punishing it severely. However, a quick rundown of the Q3 financials provides the following information:

• There is no debt on the balance sheet: No debt means that insolvency risk is about as close to zero as one can get.
• G&A expenses have remained static: Total G&A expense for the 3 and 9  months ended June 2018 was $1.5 MM and $4.5 MM respectively. One of the things I was looking for in these statements was no further growth in G&A. The fact that both of these, when extrapolated over 1 year, end up at the same place ($6.0 MM) is a good thing. This suggests to me that the G&A structure is basically “in place”, and that we hopefully shouldn’t see further growth in overhead.
• Cash + short term investments aren’t all gone: The company has $5.7 MM in cash and short term investments. For the 3 months ended June 2018, they burned $1.07 MM, and for the 9 months they burned $2.02 MM. If we assume they continue to burn cash (and essentially cannot sell significant product volumes) at the 3 month burn rate, then they will use up their entire cash position in about 16 months. If this does indeed occur, then I will be losing a significant amount of money, and I will be eating more than my share of humble pie. However, I believe management is highly incented to make sure this does not happen. Which brings me to my next point.
• Management still owns a significant number of shares: If you add up the 5 largest holdings of individual insiders (Dueck, Paterson, Pavan, Callahan, & Shah) they total ~ 23 MM shares, or about 35% of the fully diluted share count of 64.5 MM shares.  While it is probably true that these guys are all (likely) wealthier than you or I, they too have “felt the pain”. Collectively, this group of insiders has “lost” a combined ~ $31 MM ($1.50 peak price – $0.15 price today). You can imagine that they are likely very interested in seeing the share price move back in the right direction.
• UL 858 compliance isn’t sexy: When was the last time you were at a cocktail party and someone wanted to talk to you about “a safer stove”. My guess is never. The concept that PTE is selling (kitchen fire safety) and the niches that it is targeting (Seniors, University, Co-op housing) are boring. Consumer awareness of this issue is still close to zero, as “compliant” stoves likely won’t show up in showrooms till some time in 2019. This story is not blockchain or cannabis, and that being the case, many investors will not become re-engaged with it until the financial results start telling a different story. In the meantime, I would expect that we will see a flat-lined technical chart at best.
• UL 858 compliance isn’t sexy, but someone is still noticing: There were three recent press releases regarding partnerships with HPN select (purchasing group for Co-op housing), Millers Mutual (insurance company providing insurance discounts), and Buyers Access (purchasing group for multi-family housing). I would imagine that large organizations such as these don’t sit around and draw straws to see “who should we  partner with” or “what should we provide an insurance discount for”.  These are decisions that have to pass through various levels of decision making before they get the green light, and only then after they determine that this will also be good for their organization, not just Pioneering.  When the purchasing group you deal with carries a product, you (as a multi-family landlord) are far more likely to buy it – which in the long run means more sales. 
• The opportunity is still there: If you do a quick Google search on “how many multi-family housing units in the USA” you will get a number of different answers. If you believe the U.S. Energy Information Administration, the number is around 16.5 MM, and that was in 2005. If you think the National Multi Housing Council is right, then the number is 17.8 MM. For the sake of clarity, these number represent the number of buildings that house 5 or more units. If you are include all rental stock, then this number is closer to 40 MM. These units aren’t going anywhere anytime soon – they are still sitting there. Granted, everyone won’t want to buy a “Smart burner”, but it stands to reason that some will.
• The company is priced for oblivion. Right now (Q4 2018), at a share price of $0.14, the company has a market cap (using basic shares outstanding) of $7.2 MM. Adjusting for cash on the balance sheet, this implies an Enterprise value of $1.5 MM. If the product that Pioneering is offering is truly useless, and nobody wants to buy it, then this valuation is correct. In turn, if that is correct, then organizations such as HPN Select, Buyers Access, and Millers Mutual have made some very poor decisions. However, my guess is that someone out there finds value in the concept of reduced risk of fire, and in turn, a reduction in related issues such as false alarms and property damage. Like a lot of other shareholders, I’m just going to have to wait.

As always, these are only my thoughts and opinions. If you have questions or comments, I can be reached at: mark@grey-swan.com.