2018 in review….

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:

  • Pioneering Technologies
  • Titan Logix
  • Reliq Health Technologies
  • Total Telcom

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….


PTE logo

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”:

  • The balance sheet (as of June 2018) remains debt free, with $5.7 MM of cash and short term investments.
  • Assuming that sales are still slow to materialize, and cash is still being burned up at the same rate, PTE could be consuming between $225,000 and $360,000 per month, or cash burn of $1.575 MM to $2.52 MM for the 7 months from July – Dec 2018.
  • If this is indeed occurring, then cash and short term investments, as of December 2018,  could be as low as $3.2 MM to $4.1 MM.
  • This in turn means that net equity per share (using the fully diluted share count) could be as low as $0.13 to $0.15 per share, after adjusting for cash consumed.
  • If one eliminates all long term assets, then the Net-Net book value per share (using the fully diluted share count) falls between $0.11 and $0.12 per share.
  • Lastly, if one adjusts for potential cash consumed, the adjusted Enterprise value (using the fully diluted share count)  is between $2.35 MM and $3.25 MM.

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.


Titan Logix

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:

  • Revenue up 28% vs prior year.
  • Cost of goods down 3% vs prior year.
  • Gross margin up 90% vs prior year.
  • All other cash costs up 8% vs prior year.
  • EBITDA is still negative but is significantly improved at  -$0.256 MM vs -1.11 MM.
  • The company remains debt free.
  • Book value is $0.51/share, and net-net value is $0.35 per share.
  • Cash & short term investments of $8.27 MM, or $0.29 per share.

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.


RHT image

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:

Reliq valuation at Dec 14 2018

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.


Total telcom logo


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:

  • Q1 revenues essentially flat at $346K vs $345K prior year .
  • Cost of goods up 12% vs prior year Q1.
  • Gross margins down 5% vs prior year Q1, at 53% vs 58%.
  • All other cash costs down 6% vs prior year Q1.
  • EBITDA down 11% at $72K vs $81K vs prior year
  • Net earnings of $50 K flat vs prior year Q1.
  • The company remains debt free.
  • Cash on hand of $1.4MM, or $0.057 per share.

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:

TTZ comparative Q1 since 2015.PNG

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 greyswan2@gmail.com.





Titan Logix – revisited….

Titan Logix

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:

  • Attractive technical chart
  • Lots of cash & low debt
  • Reasonable cash burn
  • Clean earnings
  • High insider ownership
  • No institutional ownership & no analyst coverage
  • No self promotion
  • No share buyback
  • Out of favor sector
  • Business is easily understood
  • Potentially disruptive technology

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.

prod vs cons eia

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:

EIA WTI price 2013-2017

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.

Phases of price cycle.PNG

  • During the “low, flat price” part of the cycle: 
    • Producers are keeping a lid on costs, as price signals aren’t so strong that they are clearly signalling boom times. They are likely trying to keep service costs as low as possible, because price can’t cover up poor fiscal discipline. Additionally, because producers are so cost conscious, they are hesitant to spend to bring on new supply. At the same time, demand continues to grow, setting the stage for a demand-supply imbalance, and sowing the seeds for higher prices.
    • Service companies are reasonably busy. However, because prices are relatively flat, there are likely no new entrants into the marketplace. The number of competitors is probably fairly static. Anyone considering entering the market to compete is either well capitalized or has a strong business plan in place, as they know they will have to compete with existing service companies in an environment where producers are cost sensitive. Service companies are, for the most part, price takers.
  • During the “rising prices” part of the cycle:
    • Producers slowly start to see stronger price signals, and become more aggressive. Since they are always compared to their competitors, they are keenly aware of whether or not competitors are producing more than they are. Eventually, this combination of stronger pricing signals and “not wanting to be left behind” causes them to expand activity and bring on more production. In turn, their need for services increases, and they become less cost sensitive, as they can justify paying more given that the commodity price offsets increased service costs.
    • Service companies see their business increase. New service companies may enter the market, seeing increased activity and increased prices. Costs for services may go up, as the equipment of existing services companies is likely seeing higher utilization. New entrants may provide the incremental equipment required by producers, as existing companies may not be able to expand their fleets as quickly.
  • During the “rising & sustained high prices” part of the cycle:
    • Producers are all making money, as the sustained high prices hide all cost overruns. The most poorly capitalized/managed producers (usually chasing the highest cost projects) enter into the market, as with strong prices in hand, they can more easily sell their story in order to raise capital. With all producers running at “full tilt”, competition for services becomes fierce, and the most poorly managed producers drive up the price of services, as they likely lack fiscal discipline. The “produce at all costs” mentality sets the stage for oversupply.
    • Service companies likely have difficulty keeping up, and can therefore become price makers. Sensing the frenzied level of activity, they can effectively name their prices, knowing full well that producers have little choice. Like their producer brethren, even the most poorly managed service companies can turn a profit.
  • During the “low prices..again” part of the cycle:
    • Producers are likely stuck with high cost structure projects that were initiated during the high price environment. Saddled with the costs of these projects (that are not easily shed), they look for any costs they can easily and quickly reduce or eliminate. Negotiations with service companies become an exercise in “passing down the pain”, as they again become price makers out of necessity. New projects are either pushed off into the future or shelved entirely. Inventories of oversupplied commodity are slowly worked down.
    • Service companies see revenue declines and margin compression. Well capitalized service companies whose management (likely) have long tenures and anticipated the end of high prices are prepared, and can weather extended periods of low revenues. Poorly capitalized & poorly managed service companies exit via bankruptcy, or are swallowed by competitors. The pool of available companies shrinks, with only the strongest and best managed companies surviving. Once the cycle begins again, they are the ones that producers will turn to.

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:

  1. Titan is surviving because of its strong capital structure.
  2. Competitors are leaving (or have left) because they are poorly managed or have a weak capital structure, or both.
  3. When the sector starts to turn, there will be less companies to compete with, which means a higher concentration of business will fall into the hands of 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:  greyswan2@gmail.com






Titan Logix – a sleepy small cap wakes up.

Titan Logix.PNG

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:TLA chart Feb 2018

  • From mid-2016 through to February of 2017, the chart was almost flat, which told me interest in the company was low. Most investors that were in for a quick gain were long gone, so the shareholder base should be less flighty.
  • For the most part, volumes traded are also low, which is consistent with the idea that few investors are interested.
  • Low interest typically means low expectations. Low expectations mean that any positive news can potentially move the share price significantly higher. On the other hand, since most everybody has already given up on Titan, negative news probably won’t drive the share price much lower.
  • The moving average prices, in this case the 10 week and 30 week moving averages, had pretty much converged. However, there was no clear breakout to speak of. The share price was drifting along, neither moving up or down much.

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. Titan 3 months.PNG

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.

Titan cash flow.PNG

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: Titan 3 month Inc.PNG

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:

  • Directors and Officers do own shares, but not a large amount. Specifically Greg McGillis (CTO – 555,891 shares or ~ 2%) & Angela Schulz (CFO – 374,473 shares or 1.3%) hold shares. Alan Pyke (CEO) was hired as of February 23 2018, so he obviously held no shares at the time I made my first purchases.
  • Other significant individual shareholders on SEDI hold approximately 5.4 MM shares collectively, or about 19%. These are either shareholders that are identified on SEDI as directors, but are not identified as such on the Titan website, or persons who still hold shares but are flagged on SEDI as someone who has “Ceased to be Insider”.
  • The “Article 6 Marital Trust created under the First Amended and Restated Jerry Zucker Revocable Trust dated 4-2-07” holds 7.2 MM shares, or about 25%. This is what puts the insider picture firmly in the “neutral” camp. I could make no assertions about the motivations of this entity. Are they actively seeking to maximize the value of Titan ? I hope so, but I honestly can’t say, so the insider shareholder story flashes amber for now.

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:

  • I’m not expecting a 10x return on this. What I am expecting is that the oil & gas sector will recover, as cyclical sectors always do. When that happens, in 3-5 years, Titans revenues will increase, and their valuation and share price will follow.
  • I am expecting an annualized return of somewhere between 15% and 20% over a 3-5 year period. This means a recovery in the Titan share price of somewhere between $0.90 (20% annually over 3 years) and $1.05 (15% annually over 5 years).
  • I believe that this a relatively “low risk” opportunity. Professional money managers will beg to differ, citing the small market capitalization of Titan. However, this is what creates price inefficiency – the perception of “because it’s small, it must be risky” vs the fact that the company is debt free and cash rich, which mitigates a large degree of risk.
  • As of the writing of this (September 14th 2018), Titan has flirted with prices as high  as $0.65, and has closed fairly consistently above $0.60. While these both suggest returns north of 15% over a very short hold period, I believe the oil & gas sector is slowly on the mend, and am willing to hold given the limited downside.
  • Lastly, commodity sectors are cyclical, and the purchase of Titan occurred nearer to the bottom than the top. Energy demand tends to grow slowly and steadily, whereas energy production is driven by skittish producers who often shelve projects until market signals are as obvious as billboards. Although I don’t know when that time will come, I know it will, and in the meantime Titan can weather the storm.

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: greyswan2@gmail.com









Pioneering Technologies: Post Mortem?

PTE logo

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: greyswan2@gmail.com







Pioneering Technologies: Part 4

PTE logo

  • Parts 1 through 3 reviewed recent activity, solvency and risk, and future potential.
  • In Part 3, we determined that regulation changes in 2019 could drive large sales.
  • In Part 4, we show how increased sales will impact the company and share price.

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):


Staples smartburner.png

Source: https://www.staples.com/Smart Burner/directory_Smart Burner

Wilmar smart burnerr.png

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%.”

Source: https://www.pros.com/blog/distributor-pricing-profit-margins-pricing-markups/

This is validated via another source, as shown below:

Reasonable markup to distributors.png

Source: http://www.tom-gray.com/2012/04/26/reasonable-markup-to-distributors/

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:

PTE 274000 units.png

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.


Pioneering Technologies: Part 3

PTE logo

  • Part 1 reviewed recent share price activity from 2016 to today.
  • Part 2 compared Pioneering financials today vs the those prior to latest financing.
  • Company is not at risk of going bankrupt, & balance sheet is solid.
  • However, the question of future sales volumes is still unanswered.

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).

British kitchen fire stats.png

Source: https://www.ifsecglobal.com/innovation-at-ifsec-fire-safety-products-for-the-kitchen-by-innohome/

NFPA kitchen fire stats.png

Source: https://www.nfpa.org/Public-Education/By-topic/Top-causes-of-fire/Cooking

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:

US households by type.png

Source: https://www.nmhc.org/research-insight/quick-facts-figures/quick-facts-resident-demographics/

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:

Landlords and stove type

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.

Source: http://www.mysmokealarmla.org/history-of-smoke-alarms/

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:

US population 1976

Source: https://www.google.ca/search?source=hp&ei=57YNW_WPOJr7jwTnkIqIAQ&q=Population+of+the+USA+in+1976&oq=Population+of+the+USA+in+1976&gs_l=psy-ab.12..0i22i10i30k1.370.6433.0.9649.….0…1c.1.64.psy-ab..13.17.3024.0..0j35i39k1j0i67k1j0i22i30k1.0.rgfatTHyJiY

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:

US households size in 1976.png

Source: https://www.google.ca/search?ei=8rYNW8H7FqfojwT4_YBA&q=Average+household+size+in+USA+1976&oq=Average+household+size+in+USA+1976&gs_l=psy-ab.3…56520.64131.0.65177.….0…1c.1.64.psy-ab..8.25.2622…0j35i39k1j0i131i67k1j0i131k1j0i67k1j0i20i263k1j0i22i30k1j0i22i10i30k1.0.PVxKOQjp-hM

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:

Tech adoption curve

Source: http://www.web-strategist.com/blog/2010/01/03/social-technology-adoption-curve-benefits-and-risks/

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:

  • For various reasons, landlords likely favor coil top stoves for their units.
  • Because of this, landlords will be a very likely market for the Smart Burner.
  • Landlords control approximately 43.8 Million housing units in the US.
  • The UL858 standard change will create more awareness, and potentially more sales.
  • Increased sales of the Smart Burner would most likely happen in 2019 or later.
  • People (or companies) that are early innovators tend to make up 2.5% of the potential population, or approximately 1.1 MM of the potential 43.8 MM rental units.
  • Lastly, because people (and organizations) tend to move slowly, we would suggest that only 25% of the 2.5% of “Innovators” (approximately 274,000) would be initiating orders for the product once regulation changes in 2019.

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.

Pioneering Technologies: Part 2

PTE logo

  • 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:


PTE 2016 2018 compare bal 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.


PTE Mar 2018 cash flow.png


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).

PTE 2016 2018 Inc St.png


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:

2016 and 2018 stock based comp.PNG

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.










Pioneering Technologies: Part 1

PTE logo

  • 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.

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 ?

PTE no info chart.png

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:

PTE info chart.png


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 greyswan2@gmail.com.




https://www.accesswire.com/441990/Pioneering-Technologys-Smart BurnerTM-Poised-for-Growth-viaNew-US-Distribution-Agreement-with-Market-Leader

https://www.newsfilecorp.com/release/22043/Florida-Universities-Installing-Pioneering-Technologys-Smart Burner-as-New-School-Year-Approaches

https://www.accesswire.com/443905/Multifamily-Residential-Insurance-Carrier-Recognizes–Pioneering-Technologys-Smart BurnerTM-for-Insurance-Discount


https://www.accesswire.com/445303/Massachusetts-Fire-Department-Receives-US-Federal-Grantto-Equip-Local-Housing-Authority-with-Pioneerings-Smart Burners

https://www.newsfilecorp.com/release/22903/U.S.-Property-Management-Firm-Begins-Rollout-Pioneerings-Smart Burner-Across-Apartment-Portfolio







https://globenewswire.com/news-release/2017/11/02/1198411/0/en/Home-Hardware-Expands-Pioneering-s-Smart Burner-Offering-to-Meet-Growing-Consumer-Demand-in-Canada.html