Our latest update on Pioneering Technologies can be found here:
Our latest update on Pioneering Technologies can be found here:
Given that we are closing in on the end of the year, I thought I would publish a quick recap on those positions that I previously wrote about, namely:
Unfortunately, like most of the Canadian small cap market, all of these are either in the toilet or treading water. However, each of these has its own particular story. Without further ado, I’ll launch into it….
Pioneering has been perhaps the biggest disappointment of 2018, as not only did it fail to meet revenue targets, it’s share price also cratered catastrophically. As of today (December 12th 2018), Pioneering is trading at $0.10, roughly a 90% drop from its price back in late 2017. The short & not-so-sweet reason for this skid is “over promise and under deliver”. Given the attention and buzz that was created around Pioneering in 2016 and 2017, investor expectations became inflated, and when increased sales didn’t show up, the bottom dropped out of the share price.
For those of you that have been following this story, this is all old news. The real question is “what now” ? Now that the market cap is a shadow of it’s former self, is this company on the scrap heap, or does it have a future ?
Clearly, if I knew the answer to this, I’d already be on my island somewhere. That being said, we can take a look at “what is” to determine “what might be”:
So, at todays price of $0.10, you are actually buying Pioneering on a “net-net” basis. Is this a good deal ? It depends – if the Pioneering Smartburner is no longer useful, or has become obsolete, then the value of the company is questionable no matter how low the price gets. However, what if sales do (eventually) show up ? Or better yet, what sort of sales have to show up to make a difference ?
If we take a look at the most recent PTE financials (9 months ending June 2018), PTE recorded about $4.5 MM in total costs. Note that we are excluding any gains / losses due to the derivative liability, as this appears to have worked itself off the balance sheet. If we adjust this $4.5 MM for non-cash costs (stock based compensation, amortization and depreciation), it’s reduced to $3.5 MM of cash costs, which suggest that full 12 month costs should land somewhere in the $4.7 MM range, which we will simply round to $5.0 MM. We also know that PTE has managed to maintain gross margins at 50%, so in order to break even on a cash cost basis, PTE needs to see $10 MM in revenue.
Is $10 MM in revenue a pipe dream ? Well, we know that for fiscal 2017, PTE did indeed record $10 MM in revenue at a 50% gross margin, so the answer is “no, it’s not a dream” – they have done it once, and I find it hard to believe that in fiscal 2017 they sold to every possible customer in North America.
Perhaps the better question is why anyone would buy a Smartburner to begin with. Lord knows I wouldn’t – I have a gas stove, and I like instant heat. However, we need to separate the idea of who has the purse strings from what people want. You’ll recall that at some point in your distant past, your parents told you to wear a helmet when you were biking, skiing, or doing most anything that suggested the potential for injury. You, being the disobedient child that you were, likely fought this edict, until such time that your parents reminded you that “while you live in this house, you live by our rules”. They controlled the purse strings, and regardless of your thoughts, you complied. The same is true here – the people that are going to be cooking on a Smartburner sometime in the future won’t be doing so because they want to – they’ll do so because the owner of that home said so. That owner believes that the “de-risking” of their rental unit is well worth the annoyance of getting used to a Smartburner, as tenants are now less able to burn down the house. With compliant UL858 stoves already in showrooms (I have seen them), the trend for safer coil top stoves is here to stay. Naysayers would suggest that if compliant stoves are on the market, the landlord will just buy one of those. Well, maybe – if you have the nicest landlord in the world. One thing about landlords is they like to control costs. The Association of Home Appliance Manufacturers (AHAM) suggests that a basic coil top stove lasts between 18 and 22 years. If I am a landlord, I’m not shelling out $400 for a new stove if I can make my existing stove (which has another 10 years of life) compliant for half that cost. While you might concede this point, you might also be saying that the vast majority of landlords simply won’t buy a Smartburner, because nobody says they have too – and you are right. Pioneering doesn’t need every coil top stove to be converted, they just need some. To be specific, with over 40 million rental households in the US, they just need a very small slice of some.
So, at the end of the day, I don’t believe Pioneering is heading for bankruptcy. I do believe it was overpromoted (which led to the run to $1.50), but the concept of kitchen fire safety, an aging population, and all those rental households in the US have not gone away. I believe that at the current price of $0.10, PTE may provide some significant upside (assuming sales materialize), and is suitable for very risk tolerant small cap investors. Of course, I may be wrong, and that may cause people to call me various names, some unflattering. That’s ok – I’ve been called many things, and have survived them all. I continue to be long, and have purchased at the current price.
Some of the things I end up going long on gets lots of press – and others don’t. Titan falls into this category, as despite consistent improvement, it keeps skipping along at basically the same price.
Titan year end numbers, released on November 29th, revealed the following:
While it is true that Titan is still EBITDA negative and burned a whopping $500,000 over the course of the year, this has to be viewed in the context of a recovering energy market. As we all know, commodities are cyclical – when prices are lousy, producers stop drilling, consumers keep consuming, and eventually prices start recovering. Around that time, producers decide to start drilling again, but since bringing new production on isn’t like flicking on the light switch, there tends to be a bit of a lag, at which time price really starts recovering – not exactly rocket science.
So Titan is managing to actually increase revenues (and gross margins) while keeping a lid on G&A costs – all in the context of an energy market that isn’t running on all cylinders. This begs the question – what will things look like once activity starts to pick up even more ? While I don’t know the answer to that, I do know that Titan remains a low risk play on the energy sector and has significant upside potential. At this point, the market is valuing a debt free company at slightly more than the assets on the balance sheet, suggesting that any future cash flows will be worth the square root of zero – a proposition which I don’t believe. While I don’t know when the market will notice, I’m glad to wait and potentially pick up more as the price drifts through the low ~ $0.50 range.
I had never actually intended to write about Reliq, but when they released their infamous “we have to restate revenues” press release, they provided a textbook case of a company that I try to avoid like the plague. Overvalued, overhyped, and with a balance sheet and an exploding share count that assault the senses.
To be fair, I should point out that I did indeed own Reliq at one point, as I indicated in my prior post. However, once the valuation of Reliq started to get beyond what I could understand, I sold for a tidy profit. I will freely admit that the company has never been a favorite of mine, and because of this I cannot profess to have the depth of knowledge that I might have with other positions. That being said, Reliq hasn’t given investors much to be happy about recently, so if you are bullish on Reliq, I’m guessing you’ve done your homework, or you are simply comfortable with the implied risk.
All of that aside, the question as always is “what to do today” ? The share price is obviously much lower, so perhaps this represents a reasonable entry point.
Whenever I’m about to take a position such as this, I try to map out where things are today versus where they might go tomorrow, which is not unlike how I view my position in Pioneering Technologies. For Reliq, I took the time to map out the numbers, as shown below:
This table shows us the value (in terms of Market Cap and Enterprise Value, or EV) as of the most recent financials, and what the EV of Reliq might be as of December 31st 2018 assuming a low cash burn rate of $427,000 per month, and what the EV might be assuming a high cash burn rate of $1.03 MM per month. Both of those cash burn rates tie back to the most recent financials, where it indicated that Reliq used $1.28 MM ($427,000 per month) after changes in working capital, or $3.1 MM ($1.03 MM per month) if you exclude changes in working capital.
Some of you may have noticed that I tend to focus on the EV/EBITDA multiple as a general yardstick for valuing a company, as this metric rolls market cap, debt, and cash into one ball of wax. As investors, we are always on the lookout for value, and a company that has high EBITDA and a low Enterprise Value is a reflection of that.
In the case of Reliq, I have shown what the EV could look like as of December 31st, and what sort of EBITDA an investor needs to expect in order to justify some sort of reasonable valuation. For instance, if you believe that Reliq will continue to burn cash at the “low” rate, then estimated year end EV of $23 MM suggests that you need to see EBITDA (at some future point in time) of $2.3 MM in order to justify a EV/EBITDA multiple of 10x.
What we can see is that Reliq needs to book somewhere between $5.75 MM of EBITDA for less aggressive investors who are willing to pay 4x EBITDA, and $1.77 MM of EBITDA for those investors who are very aggressive and are willing to pay 14x EBITDA. Which leads us to the question – is this possible ? The short answer is maybe – but I’m not holding my breath.
If one takes a quick look at the Reliq financials going back to the year ending June 2016, you can see two things pretty quickly. First , EBITDA has been negative for every year, and not a “little bit negative”, or “negative and trending up”. It has simply been negative every year, and has gotten worse each year. In fact, EBITDA in this last quarter at -3.1 MM is worse than each of the fiscal years ending June 2016, 2017, and 2018.
Secondly, one can see that the cash in the company coffers has arrived as a result of share issuance. So, if you work for one of the firms that underwrote one or more of those share offerings, I must commend you on a job well done, as you managed to raise no less than $18 MM since 2016.
So, while I generally don’t shy away from speculative companies, I will be keeping my distance from this one till further notice. Perhaps Reliq will turn things around – but they’ve got a deep hole to dig themselves out of before that happens.
Since my initial post on Total (November 02 2018), not much has really changed, so this will be perhaps my shortest “update”. Nonetheless, Total did issue Q1 financials on the 29th of November ,which were largely neutral:
As the cop on the street would say, “nothing to see here, move on”, which is what I expect most of the market did. However, there are a few points worth noting that are still interesting. Firstly, its only fairly recently that Total has managed to be EBITDA and cash flow positive (Q1 of 2015), and since hitting this milestone, this is the best Q1 TTZ has recorded since then:
With the exception of shares outstanding, which have risen by a measly 1% since 2015, every other metric is improved: the cash balance is consistently growing, and EBITDA, cash flow, and earnings are all the highest they have ever been for a Q1. While this doesn’t necessarily predict the future, it sure doesn’t hurt.
Additionally, overall results for Total last year were muted by the fact that they actually lost some customers in the Environmental services sector (in the US). In addition to this, the heater controller segment was impacted by a shortage of vehicle heaters, which dampened their overall sales in this segment. Despite this, Total exited the year with net income of $476K, or EPS of $0.019.
So, while Q1 numbers weren’t blockbuster, they certainly didn’t make us run for the hills either. Based on what we can see today, barring a major catastrophe, it would seem reasonable that Total can at least repeat last years results. If they do manage to do that, then the current price of $0.18 suggests that an investor might see a flat share price or decline to around $0.14. To be fair, Total has traded as low as $0.12 in the last 52 weeks, but it only traded at that level for less than a month. For the vast majority of its “cellar dwelling”, it has tended to trade around $0.14. So, one could see a worst case loss of 33%, or a more likely loss of 22%.
On the other hand, if Total sees expansion in any one of it’s revenue streams, a lot of that incremental revenue flows straight to the bottom line. In my prior post I highlighted how the company now covers all of its costs from its recurring revenue stream, which means that any increases in existing revenue streams (or any new revenue) is “gravy”. To put this in perspective, for the year ended June 2014, Total booked revenues of $765K, whereas for the year ended June 2018 they booked revenues of $1.78 MM – a CAGR of 23%, all while maintaining gross margins of 50% or more. While last years revenue growth was an anemic 2%, Total previously had revenue growth of 6%, 38%, and 54% for the years 2015, 2016, and 2017. The gist of the argument is that it they have managed very significant growth, and I can’t imagine they recently have thrown up their arms and said “that’s good enough”. With management owning almost 30% of the shares, I’m guessing they have a strong interest in growing the company some more.
With this in mind, we continue to hold our position in Total, given that our cost basis is somewhat lower than the current price, and the fact that liquidity is sometimes limited. Assuming that Total does manage to garner more incremental revenues, we believe this could provide upside of 50% or more.
As always, these are only my thoughts & opinions. If you have questions or comments, I can be reached at email@example.com.
On October 16th, 2018, Reliq Health Technologies (RHT – TSX Venture) issued a press release indicating that the company would be “restating financials due to revenue collection issues.” Anyone that was long on Reliq immediately got the cold sweats, as the shares tanked on massive volume. As they say, a picture is worth a thousand words, and a 5 day chart as of 11:00 EST on the 16th serves up a lot of words, most of them nasty:
Those of you reading this that are (or were) long on Reliq have either sold, are contemplating selling, or are perhaps even doubling down, as the company still has cash in the bank. That being said, the question that all of you are likely asking is how could I have avoided this train wreck ? In Part 1 of this series I want to discuss how I avoided it in late 2017, and in Part 2, how you (or other investors) could have done the same throughout 2018. Similar to prior posts, I use green, amber and red headings to simply indicate those issues that are good, neutral, or bad.
My involvement with Reliq: Before delving into the nitty-gritty, I always like to provide the background as to how (or why) a particular company was brought to my attention. In this case, the story is actually not that interesting. I participated in the private placement that preceded Reliq, and held “dead money” for a number of years. Occasionally I will participate in private placements, knowing full well that there is the possibility of losing 100%. In this case, I held various illiquid companies until one of them (Moseda Technologies) changed its name to what we now know as Reliq Health Technologies.
What does Reliq Health Technologies do ? As per their website, Reliq states that they “specialize in developing innovative software as a service solutions for the $30 Billion community care market. Reliq’s IUGO care technology platform is a comprehensive SaaS solution that allows complex chronic disease patients to receive high quality care in the home or other community based setting, improving health outcomes, enhancing quality of life for patients & families and reducing the cost of care delivery”.
In plain English, I would translate this to mean that Reliq is introducing technology into the health care market to achieve the same or better outcomes while at the same time reducing costs. On the surface, this is an easy investment concept to grasp, and there is a clear value proposition. Clearly, the idea sounds like “a better mousetrap”.
I had been ignoring Reliq. But then, their chart got my attention: As I had indicated previously, my ownership in Reliq was simply a function of having participated in a private placement. Knowing that this wasn’t going anywhere for a while, I didn’t pay a lot of attention, until I noticed some life in the chart:
Having been “skipping along the bottom” for some time, Reliq started picking up in Q2-Q3 of 2017, and from a technical perspective, it didn’t look it was going to stop. So at this point, I started looking a bit deeper.
No cash on hand & lots of cash burn. At the time the chart was looking interesting, the most recent financials were those for the nine (9) months ended at March 2017. A quick look was all that was necessary – the balance sheet told me that Reliq had little money in the bank, and that it was theoretically insolvent.
However, a company can still get by if it’s not burning through it’s cash. A look at the cash flow statement killed that thought: Reliq had been burning through cash and raising capital via share issuance for some time already.
Based on this information, it was clear to me that this wasn’t a fundamental story, at least not right now. Given that the fundamental story wasn’t compelling in any way, I resolved to take a look at the holdings of insiders.
Significant insider holdings: A quick look at SEDI indicated that insiders did indeed own a significant amount of shares, approximately 11 MM of the 58 MM outstanding, or roughly 19%. So while the company clearly needed a capital infusion, insiders were at least going to feel the pain along with other shareholders.
Lots of coverage by analysts: Given that Reliq had raised capital by the time I was looking at them (Q2-Q3 of 2017), and clearly would need more, it was already a foregone conclusion that this story had been pitched to various investment firms looking for some work. What I did not know at this time was that as the Reliq share price picked up steam, one would eventually be able to find a total of 10 distinct interviews on BNN where Reliq was discussed, usually in bullish tones. For those of you that have some time, and enjoy the free entertainment, I’ve included the BNN link below.
Lots of self promotion: As if Reliq didn’t have enough eyeballs on it already, it wasn’t shy when it came to issuing press releases. From August 1st 2017 through to December 31st 2017, Reliq issued ~ 20 press releases, more than enough to incent investor interest. For instance, the screenshot below shows a total of 9 press releases in a span of a little over 1 month. Arguably, 2 of the releases are IIROC related, and therefore are beyond the control of Reliq. Regardless, all of these press releases, in conjunction with analyst coverage, acted like a giant magnet – attracting investor eyeballs, and with them, more money to chase the Reliq story.
No share buyback & rapidly increasing share count: This is fairly self explanatory. With no excess cash available to buy back shares, and a desperate need for cash to begin with, Reliq was ripe for dilution. At the time I was looking at them, total shares outstanding were ~ 58.4 MM, up from 49.4 MM the year before.
Easily understood business: As I indicated previously, the concept that Reliq was pitching was easy enough to understand – the use of technology to make the delivery of health care more accessible, more efficient, and less costly. While I didn’t have the ability to describe the details of how the technology was deployed, I could grasp the concept.
Potentially disruptive technology: Again, it was fairly clear that Reliq could significantly change the health care marketplace – if they could execute. Their ability to execute their plan was key, as without it, the story was simply one of hope. With that in mind, I decided to determine a “back of the envelope” valuation. Specifically, what sort of sales growth would they have to achieve in order for the current valuation to make sense ?
Valuation – off the charts: Valuing an early stage company is always difficult. However, even if one can’t land on what the exact value might be (or should be), one can still try and understand the implied value of the firm, to see if it make any sense at all. This is what I determined to do with Reliq.
Some time had passed since I had first started to look into Reliq, and at this point it was November of 2017, which meant I now had year end financials (year ending June 2017) to work with. Since I had no way to forecast what actual revenue and expense numbers might be, I made a number of assumptions for what I considered to be a “best case scenario”, as follows:
Once I had all this information in hand, I had a handle on whether or not the valuation of RHT made any sense or not:
To be painfully clear, Reliq had to increase revenue from $183,652 in fiscal 2017 to at least $9.0 MM, maintain gross margins of 42%, and have zero increase in all other expenses in order for the value of the company (at $0.65) to make any sense. Anything less than perfection meant that the company was likely too hyped, and the valuation made no sense. With this in mind, and given that I was well into the money at this price, I sold between $0.76 and $0.82 and redeployed the capital into other opportunities.
However, as you well know, the Reliq story doesn’t end there. Having washed my hands of Reliq and redeployed the capital, I watched the share price climb as the market made a fool out of me (as it sometimes does). I was curious as to how high the price would go, and would occasionally take a look at the financials to see if the dizzying heights of the Reliq share price were somehow fundamentally driven. Given what I could see, I believed this was not the case, and I believe the information was there for investors to see the same. This is what I’ll discuss in Part 2, as I believe that many investors could have avoided the Reliq debacle, and the associated loss of capital.
As always, these are only my thoughts and opinions. Let me know if you found this post informative, or if you just have questions or comments. I can be reached at: firstname.lastname@example.org
Following my original post about Titan Logix, I received an email that questioned the thesis of the post. I’ve extracted an excerpt from the email, as follows:
“…sure the company is cheap, but aside from book value, what makes you so sure the price will go up ?”
That is a totally valid question, and I’ll try & address the “whys” here. To (very quickly) recap the original post, there were a number of things that indicated to me that Titan was a relatively low risk buy. Note that I use the same green, amber, & red format, and that I simply list the points rather than going into a detailed explanation. Anyone that wants to review the original post can simply take a look at the prior Titan post to get the details. The distinct areas that I highlighted were as follows:
One can quickly see that the positives outweigh the negatives. However, not every investor is the same, and not every reader of this blog will have the same understanding of investing, or of this particular sector. This is where I may have come up short in my last post, so I’ll try to flesh things out a bit more here.
The price of a commodity distracts us from what is really happening. We are bombarded by price information all the time, because people can easily identify with the concept of paying too much or getting a bargain. However, when it comes to investing in companies that produce commodities, or companies that are affected by the commodity price, it’s often better to look behind the scenes. The good folks at the U.S. Energy Information Administration must have anticipated my post, because they just updated their forecast for liquid fuel production & consumption, which is shown below.
The first thing that should become apparent here is that production and consumption are always dancing with each other – sometimes one gets ahead of the other, but not by much. The two lines are tightly interwoven, constantly moving in & out of synch. That being said, while consumption & production tend to be intertwined, price is the signal that screams at us that one of them is slightly out of whack. Or, to put it succinctly, the price of crude oil is very sensitive to slight changes in either production or consumption, and therefore can be very volatile.
We have all seen this, as anyone who watches the news is constantly told that WTI is either up or down, and only a few years ago we cursed high oil prices (and high gasoline prices), whereas now we are less likely to do so. To highlight this, a 2nd chart from the EIA illustrates my point:
If you look at the first chart, the difference between the production & consumption isn’t particularly striking. However, you can still see that the blue line (production) gets slightly ahead of the khaki line (consumption), and that this gap persists into early 2016. During this time, excess production was likely put into storage, to be slowly worked off later. However, the impact on price is far more volatile, as the 2nd chart indicates. Even though the excess production isn’t enormous, it eventually craters the price by ~ 50%.
So, while both production & consumption tend to move up over time, one is driven by millions of people who tend to consume at a fairly even pace every day, whereas the other is driven by exploration programs that take a long time to analyze & execute. For instance, if a major project is announced today, that production may not make it to the gas pump for a number of years. In essence, while consumption continues to slowly ticks upwards, producers may slow down or halt production entirely when prices are weak.
OK. So producers slow down or stop production. What does this mean for Titan ? A producer company is always trying to balance how much it produces and when. Although many companies employ hedging to get away from the price roller coaster, rarely are companies 100% hedged, and some can be totally unhedged. A quick look at the price cycle since the year 2000 allows us to walk through what happens with both producers and service companies.
So, to answer the question “…what does this mean for Titan ?”, the answer is that the slowing (or stopping) of crude oil production means three things for Titan:
So these are the reasons, in conjunction with those factors I indicated in the prior post, that make me reasonably certain that Titan will see increased business as the sector turns around, and that in turn will lead to an increase in share price.
As always, I can be reached at: email@example.com
Anyone that has visited this blog before knows that I’ve provided some detailed analysis on positions that I’m already long on, and my thoughts on why I might be staying long (or not). However, in this post I wanted to go through the process as to why I initiate a long position in a company at all, and what factors get me to that point. While I’m sure that many of you are seasoned investors, I thought that some of you might not have as many wrinkles as myself, and therefore might be interested in what I call “the weeding out” process.
That being said, I should probably issue a caveat, in that I have already been long on Titan for a while – specifically, I built my position in Q1 and Q2 of 2018. Therefore, depending on what type of investor you are, you may view this post as entirely educational, given that “the price has moved, and it’s too late to buy into this story”, or you may view it as an opportunity, since “the technical chart is better today than it was back then”. Whatever your perspective, my intent is not to convince you to buy into the Titan story, but rather to “show you the tools I use and how I use them”, for those that are interested. Note that once I start describing the detailed process, I color code the headings green, amber or red to indicate how a particular part of the data influences my decision.
With that out of the way, let’s get started….
Who is Titan Logix, and what do they do ? Titan, headquartered in Edmonton, Alberta, falls into the category of “oil & gas services”, so they don’t actually produce any oil or gas, they help the producers in that process. As per their website, their mission statement is “….to provide our customers with innovative, integrated, advanced technology solutions to enable them to more effectively manage their fluid assets in the field, on the road, and in the office.” Or, in really simple language, Titan provides state of the art technology (gauges & monitoring equipment) for producers of oil to accurately measure, store, transport, and safeguard their primary asset – the oil itself. While this doesn’t sound very sexy, producer companies face a lot of scrutiny in how safely they move oil from point A to point B, not only because of safety issues, but also because they want to make sure that every drop that’s in the tanker ends up in the storage tank, or pipeline, or refinery. Not only is spillage frowned upon from a safety & environmental perspective, it’s literally money that’s getting spilled on the ground. So, tracking, measuring, and moving it accurately is their primary service.
How did I find them ? I’m not sure when I first became aware of Titan, but since I allocated capital in Q1 of 2018, I’m guessing I probably found them by around Q2 of 2017. In this particular instance I found an article written by Bob Tattersall, a mutual fund manager who tends to focus on small caps. The article made a compelling case for Titan, so I wrote up a note to myself, and Titan was formally placed on my “watch list”. So, the “finding” process was simply a function of me doing what I usually do, which is reading – the paper, magazines, or online content. Most of the time the headlines (or articles) don’t result in any good ideas, but occasionally one will see something interesting, which is exactly what happened in this case.
OK. So you found them. How do you make the decision to allocate money ? I look at a number of different factors, which I’ll dissect here.
Attractive technical chart. OK, this is perhaps a bit misleading, because I’m not really a technical kind of guy. However, I have learned that when buying into a position, getting in at the “bottom of the saucer” is often a good place to start. The chart below illustrates what I’m talking about, and was what I was looking at in February of 2018. From this I could make a few observations, specifically:
So, at this point I established that Titan looked appealing from a very basic technical perspective. From here, I move on to fundamental analysis.
No debt, lots of cash. In most cases, my next stop is almost always the balance sheet. What I’m typically looking for is either no debt or manageable debt. Obviously, no debt is preferable, but if the company has debt, and it’s reasonable given their total cash available or their cash flow, then I’ll still consider them. In this case, the most recent financials available were for the 3 months ended November 2017. A quick look confirmed what I had already read in the prior article – that Titan was sitting on $6.4 MM of cash with no short or long-term debt.
On a book value basis, this was equivalent to about $0.22 per share in cash, and total book value (excluding intangibles) was $0.51 per share. At this point, I knew that Titan had potential, but I needed to find out how long this cash might last, as it was clear that they were still losing money. So, my next stop was the cash flow statement.
Reasonable cash burn. As I indicated, cash on the balance is nice, but if all of it is consumed within one or two quarters, it doesn’t do much good. In this instance I looked at not only the 3 month statements, but the years ended August 2017 and August 2016, as I wanted to get a range of what could happen. Cash burn from operations ranged from a low of $118,000 (fiscal 2017) to a high of $1.9 MM (fiscal 2016). The 3 month cash burn for Q1 2018 came in at $74,000, implying a full year value of approximately $300,000.
While I couldn’t predict where it would fall in the future, I could safely assume that even the worst of these ($1.9 MM) suggested that the company could operate for up to 3 years, during which time they would be looking for ways to not keep burning cash. This provided further “de-risking” information, as I was comfortable that the company couldn’t be called on outstanding debt, and was also unlikely to spend themselves to death. Additionally, the cash position and the reasonable cash burn gave me some comfort that there probably wouldn’t be a share issuance on the horizon that was going to dilute existing shareholders.
Clean earnings. Once I’m comfortable with the debt and cash situation, I take a look at the income statement to determine how “clean” the earnings are. What I’m looking for is either a lot of change in how revenues & expenses are classified on a year over year basis, or revenues & expenses that are difficult to understand. A quick look at the Titan income statement confirmed that things were pretty simple:
Nothing on this income statement screams “this is strange”. Costs are easily understood at a glance, and a deeper dive provides some glimmers of hope. While revenues are only up slightly, gross margins are significantly improved, & total expenses (excluding FX) are only up about 3% YoY. All in all, the income statement doesn’t offer up anything out of the ordinary, so at this point I can move on to qualitative factors.
High Insider ownership. After viewing insider holdings on SEDI, I came to the conclusion that the insider part of the puzzle was neutral for a number of reasons:
No analyst coverage or institutional ownership. I could find no evidence of any recent analyst coverage, or that any mutual funds held a position. The lack of analyst coverage is consistent with what I was expecting, as I would find it unlikely that a company as well capitalized as Titan would need to do a capital raise, which in turn would go hand in hand with analyst coverage. Additionally, the lack of any institutional holdings (outside of the Zucker estate) is a plus, as this means that there is no potential for a large block of shares to be sold off if a mutual fund manager decides to liquidate. The flip side of this is that there is the potential for the shares to get repriced if a mutual fund decides to buy in once results improve.
No “self promotion”. Quite often, a company will become aware that nobody is interested in them. Lack of interest usually means a depressed share price, which some companies can find understandably bothersome. So, in order to “create a buzz”, they may hire an IR firm to engage the public, or the company itself will start issuing press releases which sound exciting, but simply inflate normal events. A classic example would be “Widget corporation completes sale of widgets to Multi-national accounting firm”, which sounds great. However, at the end of the day, isn’t every company supposed to be trying to make big sales – isn’t that their job ? In the case of Titan, all I found were “business as usual” types of press releases, which confirmed that there wasn’t any artificial inflation of the share price.
No share buy back. I could find no evidence of any share buy backs, and the fact that total shares outstanding had remained fairly static confirmed this. This being said, a share buy back is a vote of confidence by management, but lack of a share buy back isn’t necessarily a lack of confidence. If that were the case, this would mean that the vast majority of firms listed publicly would be broadcasting a lack of confidence by virtue of the fact that there was not a share buy back in place. So, rather than being red, this section ends up amber.
Out of favor sector. I think this is fairly self-evident. The energy sector in Canada, and the associated service companies, had been out of favor for a while. One might argue that this is a redundant statement, given the flat chart of Titan. In any case, the fact that the sector was clearly out of favor meant less eyeballs (and money) to compete with.
The business is easily understood. Again, this is a fairly simple concept. If I was on a plane, and had to explain to the guy next to me what Titan did, could I ? I’m fairly confident I could. While I can’t say that I’m an expert in how their monitors (or gauges, or whatever) work, the concept is easily communicated.
Potentially disruptive technology. Lastly, I’m always on the lookout for something that will shake up the marketplace. In this case, I was not aware of anything that Titan was doing that could be called potentially disruptive. That being said, if this was a prerequisite for every investment, I wouldn’t be investing in anything. So this is amber rather than red.
The final verdict – A buy at an average price of $0.52. As I indicated, I ended up buying Titan. While some parts of my research turned up a few amber lights, there was nothing that screamed “run away”. Also, I should be clear about my expecations about Titan:
As always, these are only my thoughts and opinions. Let me know if you found this post informative, or if you just have questions or comments. I can be reached at: firstname.lastname@example.org
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:
As always, these are only my thoughts and opinions. If you have questions or comments, I can be reached at: email@example.com
We closed Part 3 of our review with the belief that regulation changes to coil top stoves in 2019 would create safety awareness, and in turn, could drive increased sales of the Smart Burner product. Given the very large size of the US market (43.8 MM rental households), we decided that only a small fraction, 274,000, or about 6/10 of 1%, might install a Smart Burner once the regulation change takes effect.
What’s the impact of sales of 274,000 units: Now that we have determined what we believe sales could look like in 2019 (post “regulation change”), we can relatively easily determine what the economic impact (on the company) will look like.
From publicly available information, we can see that the Smart Burner sells for anywhere between $190.77 US and $221.99 US, as per information from both the Staples Supply and Interline Wilmar websites (below):
Source: https://www.staples.com/Smart Burner/directory_Smart Burner
Source: https://www.wilmar.com/Search?keywords=Smart Burner&filterByCustomizedProductOffering=False&previouslyOrdered=False
These prices are not reflective of what Pioneering might be receiving, as both Staples, Wilmar, and HD supply act as distributors. Therefore, this leaves us with an unknown: we know how much the distributor receives when the consumer buys a Smart Burner, but we do not know how much Pioneering is receiving from the distributors. However, we do know that the distributors apply their own mark up. If we can make a reasonable estimate as to how much distributors typically mark up an item, then we can effectively determine how much they are paying when they purchase it from Pioneering.
While I am no “supply chain” expert, some web research provides us with the following information:
“The average wholesale or distributor markup is 20%, although some go as high as 40%.”
This is validated via another source, as shown below:
Both of these data sources suggest that the distributor markup could be anywhere in the range of 20% to 40%. With this data in hand, we can then calculate what the revenue stream to Pioneering would be, using these ranges as bookends. With this information, we can extrapolate what the sale of 274,000 units could look like, under the following assumptions:
• We are only calculating sales of Smart Burners in the US market. Sales in the Canadian market would be incremental to this analysis.
• We are not attributing any value to any other Pioneering products, nor are we attributing any value to the partnership Pioneering has with Innohome.
• We use the lowest price we could find, $190.77 US.
• We assume that COGS (& gross margin) will come in at 50%.
• Because Pioneering is domiciled in Canada, we convert gross margin from US$ to CAD$.
• We use a conservative FX rate of $0.90 US$ = $1.00 CAD$. This is the weakest US$/CAD$ FX rate over the last 5 years, and the average FX rate (2014 to June 2018) has been approximately 0.80. A stronger US$ would improve these results.
• We apply the FX rate directly to the US$ gross margin, rather than attempting to model how the accounting for FX gains or losses would appear on the income statement. We realize that actual accounting gains/losses would be realized via currency hedging, etc.
• After converting gross margin to CAD$, we continue to use CAD$ for the rest of the analysis, as Pioneering G&A costs are denominated in CAD$.
• We assume G&A increases significantly, coming in at an annual amount of $12 MM CAD, double the current G&A costs which are forecast at ~ $6.0 MM CAD for fiscal 2018.
• We ignore non-cash charges such as DD&A, as they are not material (~ $30,000 CAD$ for fiscal 2017).
• We assume a corporate tax rate of 25%.
• We use the total diluted shares outstanding.
The outcomes of a sales volume of 274,000 Smart Burners under various distributor mark up percentages is shown below:
When we began this analysis, our thesis statement was that this was “a sales story”, and the key was whether or not Pioneering could increase sales. We believe that with pending regulation coming into effect in 2019, sales are likely to increase, and in doing so, will drive the profitability (and share price) of Pioneering. This being the case, we believe that todays share price weakness is a significant opportunity for those investors that are risk tolerant and have a longer time horizon.
Disclosure: The author of this analysis holds a long position in PTE. The author has received no compensation from Pioneering Technologies for the writing of this analysis.
When we ended our discussion of Pioneering in Part 2, the key question we were trying to answer was one of sales: can Pioneering increase sales of the Smart Burner, and when. However, to understand the sales story, we should also understand the product, why it appeals to a particular market segment, and how large this market segment is.
The product is unique. The Smart Burner is unique in that it prevents a fire from occurring, rather than setting off an alarm after the fact, or putting out the fire via an attached automated fire extinguisher or sprinkler. There are a number of safety devices on the market that do one (or perhaps even both), but one of the key points raised by end users is that prevention of combustion is far superior to an alarm or a product that extinguishes a fire after the fact. End users have highlighted that once an alarm is set off, the building may still need to be evacuated, and the local fire department may be on the way, regardless of whether or not the fire has been extinguished. When viewed in the context of an apartment building, this causes inconvenience for the residents, and may imply some cost to the building operator for each visit by the fire department. Additionally, residents & property are clearly less at risk from a situation where there is no combustion vs one where combustion occurs and is extinguished.
In addition to this, the Smart Burner is unique in that it meets the pending change to UL858 (Underwriter Laboratories) regulation, which will take effect in early 2019. The UL858 change will necessitate that all coil top stoves sold in the North American market must pass an ignition test. The test requires that an electric coil top stove, at it’s maximum setting, must be allowed to operate for 30 minutes with a pan of cooking oil on the element. The stove must operate for 30 minutes or until such time that the cooking oil ignites. If ignition occurs, then the product cannot be sold North America.
The product is meeting a distinct need. Statistics indicate that the vast majority of fires start in the kitchen, so the product has a clear application. The pie chart (below) shows quite clearly that over ½ of all residential fires start as a function of cooking. While this particular pie chart represents fires in Great Britain, data from the US National Fire Protection Association (NFPA) is consistent with British statistics (NFPA data also shown below).
This data suggests that there is a very clear niche market that is currently not being addressed. However, while it is clear that a market exists, we have to ask how large this market is.
The size of the potential market is large. Data sourced from the National Multi Family Housing Council provides the following snapshot of the US housing population:
From this data, we can quickly see that there are 118 Million households in the US that could potentially install a Smart Burner. Of this total amount, we will ignore the Owner-Occupied segment. Home owners are far more likely to purchase a stove that is esthetically pleasing (glass top, gas, induction) vs one that is utilitarian. By comparison, the 43.8 MM rental units are owned by landlords, who are typically driven by cost and functionality. If we put ourselves in the shoes of a landlord, we can see that traditional coil top stoves are an easy choice for rental units based on the following criteria:
While a landlord may ultimately put in whatever they want, for the various reasons shown above, coil top stoves are an easy choice. Coil top stoves are cheap, simple, pose no extra risk from a natural gas source, have no cooking surface (glass top) that can shatter, and do not require special pots or pans to be used. So from this data, we can say that out of the 118 Million households, the 43.8 Million rental households are the likely candidates for the installation of a Smart Burner.
With this data in hand, we then have to ask ourselves how many of these landlords will install a Smart Burner ? Again, the exact answer is difficult to pinpoint, but to answer this we will look at the implementation of another safety device – the home smoke alarm.
The first battery operated smoke alarm was available as far back as 1969. However, smoke alarms were not widely used, given that there was no law or regulation that required their use. In 1972, about 200,000 smoke alarms were sold in the United States. This changed significantly in 1976, when the NFPA (National Fire Protection Association) passed NFPA101, which was referred to as the “Life Safety Code”. This was the first document that stated “smoke alarms are required to be in every home”. By 1976, 8 Million units were sold, and in 1977, 12 Million units.
This information highlights two important consumer trends. First, if consumers are left to their own devices, the majority tend not to implement safety improvements. This is not entirely surprising. Readers who live in jurisdictions where it snows have experienced this. While snow tires significantly improve stopping in winter conditions, many consumers prefer to use all season tires in order to save money.
Secondly, when regulation finally takes effect, the purchase of the device can experience a sharp increase. While the parallel between smoke alarms and the Smart Burner is not exactly the same, we are also not suggesting that the increase in Smart Burner purchases would be this significant. What we are saying is that the change in the UL858 standard will create awareness, and consumers (such as landlords) may be more likely to purchase a Smart Burner for their rental units.
This brings us back to our question, specifically, how many of these landlords will install a Smart Burner ? Based on our smoke alarm example, we know that the introduction of regulation increased sales by a factor of 40 – but this was in 1976. To better understand what total sales of 8,000,000 smoke alarms in 1976 really means, we have to understand what the population of the US was in 1976, which (lucky for us) is relatively easy to do:
Lastly, because we are comparing “households”, we have to adjust for the number of people per household, which has changed since 1976. Again, this is also easy to find:
From all of this data, we can infer that in 1976 there were 75,432,526 total households (218,000,000 total population / 2.89 persons per household), of which 8,000,000 purchased smoke detectors after the introduction of NFPA 101, or a total of 10.6% of all US households.
This answers our question as to what percentage of landlords might purchase a Smart Burner. However, we would suggest this 10.6% to be a “pie in the sky” type of figure. The UL858 change will require that any new coil top stove sold in North America is compliant – not that any homeowner or landlord (who already owns a stove) must be compliant with a stove they already own. We would suggest that once the UL858 change takes effect, and compliant products begin to show up at retailers, consumer awareness will increase, which in turn will spur sales of the Smart Burner. Landlords, seeing that “safer” stoves are available, may want to achieve a similar level of safety with their existing coil top stoves. By reducing false alarms and potential fires, a Smart Burner may be able to save them money via reduced insurance rates, or simply decreases the risk profile of their housing units. So, some landlords may decide to purchase a Smart Burner to better equip & de-risk their housing portfolio. Like any new (or disruptive) technology, adoption does not occur “en masse”, and different people (and organizations) will take more or less time to decide to adopt a new product or methodology. This is consistent with what is known as “The Technology Adoption Curve”, which is shown below:
One can see that “Innovators”, who are early adopters of new technology, make up 2.5% of the potential marketplace. To be very clear, we are not suggesting that a safety device such as the Smart Burner is as sexy (or interesting) as an Iphone, we are simply highlighting what percentage of “innovative” landlords might be tempted to purchase a Smart Burner. In addition to this, it is unlikely that the entire 2.5% of the landlords that are “Innovators” will suddenly rush to order the product come 2019. Because of this, we would suggest that only a portion of this group will be interested in purchasing a Smart Burner in 2019. We would err on the side of conservatism, and in doing so, suggest that perhaps 25% of potential “Innovators” might purchase a Smart Burner in 2019, or 274,000 in total (43.8 MM x 2.5% x 25%).
In summary, our lengthy discussion of the potential market size (and the associated opportunity) highlights a few key points:
This information provides a more definitive answer to the question we were left with at the end of Part 2. When we concluded Part 2 of our review, we had determined that the “million dollar question” was if Pioneering could actually sell increased volumes of the Smart Burner, and if so, when might we see these increased sales. Having answered this question, Part 4 of our review will focus on how such increased sales might impact earnings & share price.
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:
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.
Who are they and what do they do ? Pioneering Technologies is based out of Mississauga, Ontario, and produces fire safety products that prevent kitchen fires. Having been listed on the TSX Venture exchange for over 10 years, their flagship product, the “Smart Burner”, allows users of traditional coil top stoves to replace the existing coils with the Smart Burner, which allows for the cooking of food, but prevents temperatures that reach combustion. Pioneering also provides other similar safety products that are cooking related, such as the SafeTSensor for microwave ovens and the Range Minder, which works with gas, ceramic, or coil top stoves. However, we will be focussing on their flag ship product, the Smart Burner, as this makes up the bulk of their sales. Our discussion is broken into four parts as follows: company activity & share price activity from 2016 to today (Part 1), whether the company is in better or worse shape today (Part 2), why the investment opportunity has upside (Part 3), and what future results and associated share price might look like (Part 4). The reader should note that all financial values are quoted in Canadian dollars unless otherwise indicated.
Part 1: Why is this chart so ugly ?
There are two things that the above chart makes very clear. First, any investor who went long on PTE in early 2016 (or earlier) could have done very well, as shares peaked at $1.50 in February of 2017. The second thing that becomes clear is that any investor who went long in early 2017 (or later) experienced a significant loss. So, the question is: what caused the significant run up in share price, and what caused the significant decline?
If we look at the same chart, with a bit more information, we have a better picture of what happened:
The chart above shows price movement along with the timing of non-financial press releases, earnings releases, financings, and analyst research. We categorize a “non-financial press release” as any press release that imparts information outside that of typical earnings news or any significant financial change, such as a financing. For example, a press release announcing a new large customer would be categorized as “non-financial”. While the information may be interesting (it is typically bullish), it imparts information that is entirely at the discretion of the company, and is not required (or mandated) by regulation or law.
One can see that during 2016 there was a total of 11 non-financial press releases, most of which were concentrated in the period between June & October of 2016. These press releases introduced new participants to the Pioneering story, and by creating more awareness, also created more potential buyers of the shares. With this new awareness, the shares rode a wave of popularity, peaking at $1.50 in February of 2017. In March of 2017, the company undertook a private placement at $1.10, which in turn resulted in analyst coverage by the same institution. Bullish coverage followed for approximately 8 months, until Pioneering issued full year 2017 numbers which fell well short of inflated investor expectations. Similar underperforming quarters followed in March and May of 2018, causing further sell pressure, and resulting in a 52 week low (as of May 31 2018) of $0.21.
Seasoned investors will note that this is not the first time this story has played out, as analyst coverage often is overly bullish and creates expectations which are hard to meet within a short time frame. This story is no different. Investors who purchased after Q1 of 2016 saw a relatively consistent stream of positive news, which culminated in bullish institutional coverage. Once results were clearly short of expectations, selling pressure took over, and the share price has yet to recover.
For those readers that are interested, links are included to all the noted non-financial press releases (below).
This concludes Part 1 of this review of Pioneering Technologies. For those that are interested, I will be publishing Part 2 shortly. If you have any questions or comments, you can reach me at firstname.lastname@example.org.