Pioneering issued full year financials after hours on January 28th 2021, and the results were entirely dependent on one’s frame of reference. If one were to compare full year results to fiscal 2019, they were astronomically better. If one were to compare them to Q1 or Q2 of this year, they were much worse. As the saying goes – is the glass half full or half empty ? Or in the case of Pioneering, is the share price, like an unattended stove, going to ignite or not ? Whatever the case, we are still attending to the proverbial “Pioneering stove”, as we are still long on the company, and with that being the case, we dissect the latest results using our usual green, amber, and red format for those areas we consider bullish, neutral, and bearish.

Still scraping the bottom… Again, the chart is a questions of one’s perspective. If you have been looking to acquire Pioneering – cheaply – then this is the time. Unless there is more catastrophic news waiting in the wings, it is unlikely the shares will get much cheaper. Based on trading (post earnings), it would seem that the overall market expected “so-so” results, as no wave of sales (or purchases) have overwhelmed the price. So, for those looking for some “GameStop” action, it’s not to be found here. On the other hand, for those that are already long, the share price is a bit disappointing, as “long folks” were probably hoping for some post earnings uplift. In any case, if you are looking to accumulate cheaply, now is probably the time. If you have already done so, repeat the mantra, “patience is a virtue”…

The balance sheet remains a place of refuge. The good news is that the balance sheet remains a relatively safe haven. While it’s slightly worse than it was at Q3, the balance sheet remains solid with $0.16/share in total assets, of which $0.12 are current assets. These values are virtually unchanged when compared to Q3, and the only significant movement in the balance sheet (from Q3) is on the liability side, as short term liabilities (primarily payables) rose by approximately $500K, effectively reducing tangible book value by about $0.01/share, from $0.105/share to $0.093/share. Viewed over the span of the entire year, the most significant balance sheet changes are in payables (up ~ $700K) and the inclusion of lease liabilities ($1.6 MM) due to the lease accounting changes related to IFRS16.

Perhaps the key takeaway from the balance sheet is that the cash balance, while lower, still provides flexibility in the event that sales do not pick up as anticipated. Over the course of fiscal 2020, Pioneering managed their expenses to such a degree that they only burned $422K of cash (before changes in working capital) over the entire year, and if one includes changes in working capital, they were cash flow positive. With $2.1 MM in the bank as of year end, this suggests that even in this very challenging environment, Pioneering can still manage for the foreseeable future. Conceivably, if the company continued to burn through cash at the same rate, they could theoretically continue operating “on a shoestring” for almost 5 years.

The income statement – a story of relative improvement. The way in which one views the income statement is likely a function of expectation. Without a doubt, performance has improved YoY, but it is a roller coaster – revenues are up $2.59 MM, up a solid +66%, but COGS (partly due to tariffs) are up $2.16 MM, +126%…but then other cash expenses (excluding amortization & FX) are down $1.39 MM, or -30%. Overall, total controllable expenses are down, and the overall operating loss is considerably smaller than that of 2019. Perhaps the single biggest takeaway from the income statement is the following statement, which is made on page 8 of the MD&A:

If one adjusts for this impact, then Pioneering would actually have performed reasonably well, given the uncontrollable impact of COVID on sales. Adjusted for tariffs, GM% improves from 41% to a much more robust (and historically consistent) 49%, and EBITDA would have improved from -$535K to a much smaller -$18K. Clearly, if Pioneering can make any headway on the tariff issue, it has the potential to significantly improve future results. In the meantime, 2020 results are all a function of perspective – they are significantly better YoY, but are unfortunately still underwater.

Cash flow is similar – both better and worse. Like the income statement, cash flow is better when viewed YoY. In fiscal 2019, Pioneering was hemorrhaging cash, and there were no safe havens – if one looked at cash flow before or after changes in working capital, cash from investing, or cash from financing – everything was either negative, or at best, flat. In fiscal 2020, in an environment when Pioneering had to deal with the double whammy of COVID and tariffs, they managed to be cash flow positive over the course of a very difficult year. Some cynics might say that these numbers are better because of a significant CEWS (Canada Emergency Wage Subsidy) offset, and while there was some of this in fiscal 2020 (approximately $175K), this amount does not change the overall story. So, the bad news is that cash flow is much lower than it was when compared to Q3, but on an overall basis, $226K of positive cash flow for the entire year is still an achievement. The fact that the company managed to have positive cash flow at all cannot be ignored, and is proof of the fact that they have managed reasonably well during a very difficult time.

There has been no insider selling. Share purchases and sales by insiders are thought to be a hint of what’s to come. In this case, the statement seems to be “we haven’t left yet, and we aren’t leaving now”. The company enjoys significant insider ownership, with over 25% of the total shares owned by Sr. management or Directors. As identified by those appearing on Pioneering’s website, the three largest internal shareholders are:

  • David Dueck (Director) – owns 8.74 MM shares (16%).
  • Kevin Callahan (CEO & Director) – owns 2.59 MM shares (4.6%)
  • Richard Adair (Director) – Owns 1.57 MM shares (2.8%).

So, despite some very challenging years, insiders have continued to stubbornly hold, despite the headwinds of staff issues (termination of Laird Comber), tariffs, and COVID.

Analysts have long since left this party. For someone looking to exit their position in Pioneering, this is a negative, and for those who believe there are better days ahead, this is a weak positive. To be sure, the price of Pioneering isn’t enjoying any “talking up”, so a buyer today knows they aren’t buying into an inflated price. Since we are long on Pioneering, we obviously have an interest in the shares moving higher – someday. In the meantime, we take comfort in the fact that unless there is some more truly ugly news out there, the shares won’t fall from their ” precipitous highs” any time soon.

There’s been a change in Senior Management. Included in the January 28th press release was news that Pioneering’s President, Dan MacDonald, had left the company. On the surface, this sounds negative. However, the truth is, announcements like this are almost always ambiguous, and are hard to ultimately decipher unless there are other obvious issues at hand. At the end of the day, any member of a company has a life outside of their “company duties”, and likely a family and everything else that goes on with that. It is quite possible that Mr. Macdonald may have an offer on the table from a totally different company that is hard to pass up – or he may be leaving because he simply wants to slow down a bit, and is tired of the “grind”. Given that he has ownership of approximately 405K shares, it would have been much more negative if he would have dumped these shares and then resigned. So, while it is true that there is a management gap for the foreseeable future, this news can ultimately go either way. Without better information in hand, we believe it is neutral at this point.

At the end of the day, Pioneering still has potential – but is has been a long road. At this point, we would argue that only the hardiest of retail investors are still holding Pioneering, or are contemplating a purchase. Since its peak in both share price and financial results in 2017, the company has endured three brutal years that have caused any holders to question their resolve. However, if you are still reading this, you likely have some sort of interest in Pioneering, so here’s what we would say to a holder of PTE shares at this point:

  • Despite their ugliness, these numbers are an improvement: As dismal as these full year numbers look, they are an improvement over 2018 and 2019. As hard as it is to believe, despite a significant increase in COGS, Pioneering had better net income and cash flow for fiscal 2020 than it did in fiscal 2018 and 2019.
  • Their cash balance should tide them over: Given how Pioneering has reigned in costs, even their reduced cash balance of $2.1 MM is enough to keep them going for the next few years – bankruptcy isn’t lurking around the corner.
  • They have hit $10 MM in revenue before: In 2017, Pioneering had revenues of over $10 MM, and up to Q2 of fiscal 2020, it appeared that Pioneering could replicate that number, with quarterly revenue growth of 13% (Q2 vs Q1) and YTD sales of $4.7 MM. The point is that if Pioneering can keep their “non-COGS” costs in line, they can be profitable even with the impact of tariffs. To be sure, they will not be as profitable, but they won’t be bleeding cash.
  • Any tariff change will be huge: If Pioneering makes any headway on the tariff issue, it will be a huge tailwind for the company.
  • At the current price, PTE is a value play: What was once a growth story has now been loitering in the waiting room of small cap value for some time. At the current price, Pioneering is a debt free small cap with almost $.04 of cash on the balance sheet that is trading at less than tangible book value.
  • Dilution risk is unlikely: Given their low cash burn, it is probably unlikely that the company would risk dilution at such a low price.
  • A backlog of orders would not be a total surprise: Companies in both the US and Canada have been on “pause” for some time now, but slowly, business will have to come back to something resembling normal. If lockdowns continue, this simply means….more people cooking at home, and more fires will happen. If lockdowns are lifted, it means that companies who previously parked their orders will probably move ahead with them. The first scenario raises awareness and potentially future sales, the 2nd scenario brings back sales that were already contemplated earlier.

We are still long on Pioneering, and may add at these levels. Questions or comments can be sent to mark@grey-swan.com.

2 Comments

  1. Wonderful work here. I am long on PTE since the summer of 2019 and will add at these prices.

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