Two noteworthy things happened this week, one of them impactful to our portfolio, the other a testament to the times we live in. On March 1st, Pioneering issued Q1 financials after hours, and the results were unfortunately weaker than we might have hoped. Before the full digestion of these results could happen, we became aware that March 2nd was the birthday of Theodor Geisel, better known as Dr. Seuss. While this news usually doesn’t make major headlines, what did make headlines is the fact that cancel culture had finally found Dr. Seuss, and he too was made to pay the price. While this post won’t dwell on this fact, we thought that in honor of the Doc, we would go through the Pioneering results in “Seussian” fashion. It will be a shorter read, but we have no doubt it will be clear to even the youngest investor out there. Using our format of green, amber and red, we will reveal whether Pioneering is still living….or dead.
The chart may yet go lower still!
Which would seem to be a bitter pill.
If one is long on shares already,
Then perhaps it’s time that one holds steady.
For those who seek to join the fray,
Cheaper prices may be on the way.
While all of that may sound intense,
We don’t believe we’ll see 3 cents.
The balance sheet is somewhat worse.
As lingering COVID exerts its curse.
Without strong sales, cash has burned,
As the economy slowly turns.
We see that inventory has been growing,
The seeds of future sales it’s sowing.
So while the balance sheet is not a total fright,
It is a somewhat “uglier” sight.
The key here is that without debt,
Remaining cash will sustain them yet.
The income statement is plain ugly.
Or as the kids say, “that is fugly“.
With sales in a precipitous drop,
The bleeding has of yet to stop.
Not only tariffs have caused some pain,
But increased marketing, not spent in vain.
While this quarter looks like hell,
We still believe that safety sells.
While rental rates won’t go higher,
Those landlords still hate kitchen fires.
Cash flow has a similar fate.
As without earnings, it must deflate.
Within this statement, there’s only one good read,
The fact that cash is bleeding….at a slightly lesser speed.
If sales don’t take a higher turn,
There’s precious little cash to burn.
Be that said, if sales grind higher,
Then the future won’t look quite so dire.
But, rather than prognosticate,
We will all just have to wait.
Since Q4, there’s been little change.
But nonetheless, some things are strange.
One day last month, I fell off my chair:
Pioneering traded 7 MiIlion shares!
Such volume was beyond the norm,
And suggested some sort of earnings storm.
Alas, it seems, it was not to be,
And the shares have settled down, quite evenly.
Aside from that, there’s not much to say,
Insiders still hold, and have not gone away.
Tariffs are still a nagging hurdle,
And sales that move like an unhurried turtle.
We hold still, as we think,
This ship is not on course to sink.
With that in mind, we should impart
This ride is not for the faint of heart.
With all small caps, there is the chance
You could lose your shirt,
And perhaps your pants.
As always, as we like to say, if you have comments, fire away!
We hope this read has struck a spark, and if so – just email Mark.
Pioneering issued full year financials after hours on January 28th 2021, and the results were entirely dependent on one’s frame of reference. If one were to compare full year results to fiscal 2019, they were astronomically better. If one were to compare them to Q1 or Q2 of this year, they were much worse. As the saying goes – is the glass half full or half empty ? Or in the case of Pioneering, is the share price, like an unattended stove, going to ignite or not ? Whatever the case, we are still attending to the proverbial “Pioneering stove”, as we are still long on the company, and with that being the case, we dissect the latest results using our usual green, amber, and red format for those areas we consider bullish,neutral, and bearish.
Still scraping the bottom… Again, the chart is a questions of one’s perspective. If you have been looking to acquire Pioneering – cheaply – then this is the time. Unless there is more catastrophic news waiting in the wings, it is unlikely the shares will get much cheaper. Based on trading (post earnings), it would seem that the overall market expected “so-so” results, as no wave of sales (or purchases) have overwhelmed the price. So, for those looking for some “GameStop” action, it’s not to be found here. On the other hand, for those that are already long, the share price is a bit disappointing, as “long folks” were probably hoping for some post earnings uplift. In any case, if you are looking to accumulate cheaply, now is probably the time. If you have already done so, repeat the mantra, “patience is a virtue”…
The balance sheet remains a place of refuge.The good news is that the balance sheet remains a relatively safe haven. While it’s slightly worse than it was at Q3, the balance sheet remains solid with $0.16/share in total assets, of which $0.12 are current assets. These values are virtually unchanged when compared to Q3, and the only significant movement in the balance sheet (from Q3) is on the liability side, as short term liabilities (primarily payables) rose by approximately $500K, effectively reducing tangible book value by about $0.01/share, from $0.105/share to $0.093/share. Viewed over the span of the entire year, the most significant balance sheet changes are in payables (up ~ $700K) and the inclusion of lease liabilities ($1.6 MM) due to the lease accounting changes related to IFRS16.
Perhaps the key takeaway from the balance sheet is that the cash balance, while lower, still provides flexibility in the event that sales do not pick up as anticipated. Over the course of fiscal 2020, Pioneering managed their expenses to such a degree that they only burned $422K of cash (before changes in working capital) over the entire year, and if one includes changes in working capital, they were cash flow positive. With $2.1 MM in the bank as of year end, this suggests that even in this very challenging environment, Pioneering can still manage for the foreseeable future. Conceivably, if the company continued to burn through cash at the same rate, they could theoretically continue operating “on a shoestring” for almost 5 years.
The income statement – a story of relative improvement.The way in which one views the income statement is likely a function of expectation. Without a doubt, performance has improved YoY, but it is a roller coaster – revenues are up $2.59 MM, up a solid +66%, but COGS (partly due to tariffs) are up $2.16 MM, +126%…but then other cash expenses (excluding amortization & FX) are down $1.39 MM, or -30%. Overall, total controllable expenses are down, and the overall operating loss is considerably smaller than that of 2019. Perhaps the single biggest takeaway from the income statement is the following statement, which is made on page 8 of the MD&A:
If one adjusts for this impact, then Pioneering would actually have performed reasonably well, given the uncontrollable impact of COVID on sales. Adjusted for tariffs, GM% improves from 41% to a much more robust (and historically consistent) 49%, and EBITDA would have improved from -$535K to a much smaller -$18K. Clearly, if Pioneering can make any headway on the tariff issue, it has the potential to significantly improve future results. In the meantime, 2020 results are all a function of perspective – they are significantly better YoY, but are unfortunately still underwater.
Cash flow is similar –both better and worse. Like the income statement, cash flow is better when viewed YoY. In fiscal 2019, Pioneering was hemorrhaging cash, and there were no safe havens – if one looked at cash flow before or after changes in working capital, cash from investing, or cash from financing – everything was either negative, or at best, flat. In fiscal 2020, in an environment when Pioneering had to deal with the double whammy of COVID and tariffs, they managed to be cash flow positive over the course of a very difficult year. Some cynics might say that these numbers are better because of a significant CEWS (Canada Emergency Wage Subsidy) offset, and while there was some of this in fiscal 2020 (approximately $175K), this amount does not change the overall story. So, the bad news is that cash flow is much lower than it was when compared to Q3, but on an overall basis, $226K of positive cash flow for the entire year is still an achievement. The fact that the company managed to have positive cash flow at all cannot be ignored, and is proof of the fact that they have managed reasonably well during a very difficult time.
There has been no insider selling. Share purchases and sales by insiders are thought to be a hint of what’s to come. In this case, the statement seems to be “we haven’t left yet, and we aren’t leaving now”. The company enjoys significant insider ownership, with over 25% of the total shares owned by Sr. management or Directors. As identified by those appearing on Pioneering’s website, the three largest internal shareholders are:
David Dueck (Director) – owns 8.74 MM shares (16%).
Kevin Callahan (CEO & Director) – owns 2.59 MM shares (4.6%)
Richard Adair (Director) – Owns 1.57 MM shares (2.8%).
So, despite some very challenging years, insiders have continued to stubbornly hold, despite the headwinds of staff issues (termination of Laird Comber), tariffs, and COVID.
Analysts have long since left this party.For someone looking to exit their position in Pioneering, this is a negative, and for those who believe there are better days ahead, this is a weak positive. To be sure, the price of Pioneering isn’t enjoying any “talking up”, so a buyer today knows they aren’t buying into an inflated price. Since we are long on Pioneering, we obviously have an interest in the shares moving higher – someday. In the meantime, we take comfort in the fact that unless there is some more truly ugly news out there, the shares won’t fall from their ” precipitous highs” any time soon.
There’s been a change in Senior Management.Included in the January 28th press release was news that Pioneering’s President, Dan MacDonald, had left the company. On the surface, this sounds negative. However, the truth is, announcements like this are almost always ambiguous, and are hard to ultimately decipher unless there are other obvious issues at hand. At the end of the day, any member of a company has a life outside of their “company duties”, and likely a family and everything else that goes on with that. It is quite possible that Mr. Macdonald may have an offer on the table from a totally different company that is hard to pass up – or he may be leaving because he simply wants to slow down a bit, and is tired of the “grind”. Given that he has ownership of approximately 405K shares, it would have been much more negative if he would have dumped these shares and then resigned. So, while it is true that there is a management gap for the foreseeable future, this news can ultimately go either way. Without better information in hand, we believe it is neutral at this point.
At the end of the day, Pioneering still has potential – but is has been a long road. At this point, we would argue that only the hardiest of retail investors are still holding Pioneering, or are contemplating a purchase. Since its peak in both share price and financial results in 2017, the company has endured three brutal years that have caused any holders to question their resolve. However, if you are still reading this, you likely have some sort of interest in Pioneering, so here’s what we would say to a holder of PTE shares at this point:
Despite their ugliness, these numbers are an improvement: As dismal as these full year numbers look, they are an improvement over 2018 and 2019. As hard as it is to believe, despite a significant increase in COGS, Pioneering had better net income and cash flow for fiscal 2020 than it did in fiscal 2018 and 2019.
Their cash balance should tide them over: Given how Pioneering has reigned in costs, even their reduced cash balance of $2.1 MM is enough to keep them going for the next few years – bankruptcy isn’t lurking around the corner.
They have hit $10 MM in revenue before: In 2017, Pioneering had revenues of over $10 MM, and up to Q2 of fiscal 2020, it appeared that Pioneering could replicate that number, with quarterly revenue growth of 13% (Q2 vs Q1) and YTD sales of $4.7 MM. The point is that if Pioneering can keep their “non-COGS” costs in line, they can be profitable even with the impact of tariffs. To be sure, they will not be as profitable, but they won’t be bleeding cash.
Any tariff change will be huge: If Pioneering makes any headway on the tariff issue, it will be a huge tailwind for the company.
At the current price, PTE is a value play: What was once a growth story has now been loitering in the waiting room of small cap value for some time. At the current price, Pioneering is a debt free small cap with almost $.04 of cash on the balance sheet that is trading at less than tangible book value.
Dilution risk is unlikely: Given their low cash burn, it is probably unlikely that the company would risk dilution at such a low price.
A backlog of orders would not be a total surprise: Companies in both the US and Canada have been on “pause” for some time now, but slowly, business will have to come back to something resembling normal. If lockdowns continue, this simply means….more people cooking at home, and more fires will happen. If lockdowns are lifted, it means that companies who previously parked their orders will probably move ahead with them. The first scenario raises awareness and potentially future sales, the 2nd scenario brings back sales that were already contemplated earlier.
We are still long on Pioneering, and may add at these levels. Questions or comments can be sent to mark@grey-swan.com.
Normally, an update on a company is issued when financials (or significant information) becomes available. However, Pioneering last issued Q3 financials back in late August of 2020, so this is a bit late for an update, and full year financials won’t be issued till late this month. Nevertheless, Pioneering is the one company that probably has the most coverage on this website – but the least recent coverage. Given that we have a large position in Pioneering, and that the last post occurred far too long ago, a brief recap and some thoughts on the future outlook are perhaps in order. If nothing else, it means that the review slated for late January (or early February) will be that much shorter. It should be noted that because this update is occurring “off cycle”, we will not be delving into the typical analysis of the balance sheet, income statement, or cash flow statement. Given that a significant amount of time has passed since the issue of the last financials, we would suggest that detailed analysis is best saved for later this month, when Pioneering issues full year numbers. This means that this post will be considerably shorter. On the other hand, for those with time on their hands, Part 1 of the original series can be found here.
A quick summary of Pioneering: Pioneering has been in the “cooking safety” business for over 10 years, as they manufacture various products designed to eliminate the risk of kitchen fires. It is perhaps noteworthy to point out that Pioneering products, particularly the SmartBurner, are designed with the idea of eliminating the possibility of fires. There are some other products that are designed to put out a fire automatically (once it has occurred), but like many things, an ounce of prevention is worth a couple pounds of cure. As someone who has experienced a minor kitchen fire first hand, it’s fair to say that one wants to avoid the mess of a fire in the first place. Yes, the fire extinguisher will put out a fire, but then you are stuck with the mess of cleaning up after the fire extinguisher (it is very messy), and potentially explaining to the fire department why it all happened in the first place.
Things were going well for Pioneering – sales from fiscal 2014 through to fiscal 2017 grew at approximately 50% per year, and in fiscal 2017 Pioneering recorded over $10 MM in sales, and shares peaked at $1.50. The company embarked on a new sales structure that would allow them to move more volume, and the future looked bright – but all wasn’t well.
While the company enjoyed business success (and share price success) in 2017, 2018 proved to be quite the opposite. Sales fell precipitously from $10 MM to just under $5.0 MM, and while the switch to a new sales process was one of the factors, it was later revealed that some executives of Pioneering were also less than cooperative. On January 23rd 2019, Pioneering issued a press release indicating that three senior executives, including the VP of Sales, had been terminated for cause because of “participation in a scheme aimed at competing directly with Pioneering in the cooking fire prevention market in North America.” From that point on, it was clear that Pioneering had more than the usual challenges to deal with.
All of which brings us to today – January of 2021, at a time when many jurisdictions in North America (and globally) wrestle with a 2nd round of COVID. As some jurisdictions debate more lockdowns, others have already enacted them. It’s at this juncture that an existing Pioneering investor has to determine whether or not to “continue fishing or cut bait”, as the current Pioneering story is murky to say the least. However, regardless of the current investing climate, this is where we pick up the Pioneering discussion. For the sake of consistency, the usual green, amber, and red formats are used to highlight areas that are considered to be bullish, neutral, or bearish.
The chart is giving us mixed signals. The Pioneering chart is the story of almost getting out of the penalty box….and then turning around and going right back in. In the early part of 2020, Pioneering hit the abysmal low of $0.03/share (yes, we did buy more), and appeared to be at an inflection point. Not two months later, in the spring of 2020, Pioneering hit the lofty heights of $0.15, as Q1 results were better than expected….and then COVID arrived, crushing not only Pioneering but many larger companies. So, while the shares are up over a 100% from January of last year, the chart is still “skipping along the bottom” in our opinion. For those looking to acquire shares, it is probably unlikely that the shares will get much cheaper, as the traditional “tax loss selling” season has come and gone. Based on current information, we would not expect the shares to move significantly until we get closer to the release of Q4/ full year results in late January.
The company is still solid. As previously mentioned, we won’t delve into the usual details around the financial statements, as the information from August is likely dated. That being said, the company is not facing looming insolvency. The company is actually sitting on the highest cash balance it has seen since fiscal 2017 (the year Pioneering last raised capital), and at $3.78 MM, this equates to $0.067/share – about a penny lower than the price that the shares are currently trading at. The company is debt free, and total liabilities are virtually unchanged (after adjusting for IFRS impacts), so while it has been a tough year (and some cash has been eaten up) the company is on solid footing. Perhaps even more interesting is the fact that at the current price, Pioneering is almost trading at “net-net” book value ($0.07/share) and 20% under the book value of $0.10 per share.
COVID hit Pioneering hard.Anyone who has been following Pioneering knows that the share price strength in the early part of 2020 was a function of Q1 results, as Pioneering saw a strong rebound in sales at $2.2 MM, a 73% improvement on a YoY basis. But, once COVID hit, all bets were off. Sales fell significantly, and it looked like any progress Pioneering had made was erased. Add the additional impact of tariffs, and it would seem that the combination of these events might conspire to sink the company entirely. To be sure, the company took a beating given the combination of reduced sales and tariffs, but it would be inaccurate to dismiss the company entirely based on these issues alone. The world that we all inhabited less than a year ago is markedly different than it is today, and we believe that some of the trends that have emerged during COVID may yet breathe life into Pioneering. Follow our shaky logic as we walk through the reasons why Pioneering isn’t dead…
When COVID arrived, 140 million North American households locked down.Based on the latest information, there are 128 MM households in the United States, and despite the fact that a decent link can’t be found, StatsCan suggests there are approximately 12 MM households in Canada, for an aggregate total of 140 MM households in the US and Canada. All of these people, while they weren’t going to work, certainly had to keep eating.
So, companies like Skip the Dishes got busy. While companies like Skip the Dishes and Uber Eats saw an uptick in activity, the truth is that many restaurants were (and still are) teetering on the brink of disaster, as many Americans (and Canadians) still feel unsafe eating out. Simply put, it will be a while before we see restaurant dining habits return to “normal” levels. While many establishments are open, most are faced with reduced seating capacity and increased safety protocols, all of which lead to smaller numbers of diners.
However, many folks were (and still are) dealing with reduced incomes.When entire States (and Provinces) start mandating who can stay open and who must close, the unfortunate side effect is that many people lose jobs – and income. While it is true that Governments provided assistance, it’s not rocket science to deduce that Government assistance is usually less than a solid full time job, and it’s certainly more finite. While some people could afford to pay for take out every day, many simply did not have the finances to do so.
So people started cooking more – probably a lot more. The NY Times stated that the rise in home cooking is “…at a scale not seen in 50 years…”, as people are not only cooking more, but people who never used to cook are now learning. As the saying goes, necessity is the mother of invention, or in this case, the impetus to learning a very useful skill. Never in my life did I think I would be able to use the phrase “mason jar shortage” in a sentence with any relevance, yet there it is. When millennials start looking up canning recipes on their phones, you know something is brewing.
All that cooking means a few pots are going to boil over.Sure, some of those people that are cooking already know what they are doing, and some of them have gas stoves, and some of them will never learn to cook no matter what happens – but a lot of people will try their hand at cooking, or will cook more, and it’s simply a statistical fact that some of that extra cooking will result in a few overly crispy dinners, with a bit of smoke thrown in for good measure. It is no secret that cooking fires increased during the first round of lockdowns, by some estimates as much as 300%. While some of those fires might be little annoyances, some of them aren’t, and insurance companies and landlords can’t be happy. The average cooking fire costs $30,000 USD to remediate, so a $200 investment in a gadget that eliminates this risk is well worth the money.
Some of those new chefs will install some sort of safety device.Ultimately, we don’t know how many people will opt for a Smartburner (or another Pioneering device), and some households may just go out and purchase a few more fire extinguishers. But to suggest that all these events will have no impact is a stretch. Someone – not everyone, but someone will decide to install some sort of safety device. One of the statements that has been made here before is that Pioneering doesn’t need to sell to everybody, they just need to sell more. To get a handle on what sort of impact that could have on the Pioneering top line, let’s assume that in 2021, 1/10 of 1% of total North American households decide that a Smartburner is a wise investment. Since we don’t know how these households might want to purchase the Smartburner, let’s just assume (for the sake of simplicity) that they go to the Pioneering website and shell out the $200 CAD for a Smartburner. The simple math here is:
140,000,000 households x 1% x 1/10 x $200 CAD = $28 MM CAD
Is this a prediction ? Absolutely not. But it is a demonstration of the fact that Pioneering doesn’t need everyone beating a path to their door – a small fraction is just fine. One can juggle the math six ways from Sunday, but the truth is that COVID inadvertently created a situation where far more people will think about cooking fire safety, either because they just filled the kitchen with smoke, or they think they might.
But wait – Pioneering is getting killed on tariffs. This statement is correct. Yes, Pioneering is getting stiffed with tariffs, but the tariffs aren’t so steep that the products are unprofitable, they are just less profitable. While we don’t have any more political insight than the next person, it stands to reason that if one has a looming problem, you don’t just hope that it might go away. Recent pundits have suggested that despite the changing of the guard South of the border, tariffs aren’t going away anytime soon. However, Pioneering is actively seeking to either remove or mitigate the impact of the tariffs, as they do have a reasonable argument to make. As per the MD&A, Pioneering has indicated that “….Pioneering is currently working with the various industry participants and legal counsel to pursue a potential exemption from these tariffs on the basis of the uniqueness of its products, their public safety benefits and the fact that many of the Company’s customers in the U.S. are governmental agencies funded by U.S. taxpayers.” We would be very surprised if the Executives of Pioneering were not working overtime to mitigate the tariff issue, as any progress on this front flows right to the bottom line.
It was once said that one should never let a good crisis go to waste. As ugly as COVID-19 has been, the environment it has created is an opportunity for Pioneering. The mandated “stay at home” orders issued by Governments, in conjunction with the closing of eateries and the almost palpable fear of risking exposure forced Canadian and Americans to do what they had not done for a very long time – cook in their own homes. While it’s too early to tell what Q4 (and full year) numbers will bring later this month, we would suggest that despite it’s almost “flat lined” share price performance, Pioneering has some life in it yet.
As always, these are only my thoughts & opinions. If you have questions or comments, I can always be reached at mark@grey-swan.com.
It was with a fair bit of dismay that I read the recent headlines that Pioneering was terminating executives with cause. Not only was the company underperforming, it now had the added burden of some very negative press, the likes of which is not seen often. In the 20 years that I have been investing, this was the first time I’ve been stung by an event quite like this. There’s been times in the past where company shenanigans have reared their ugly heads, but usually they are in the form of inflated revenues (and inflated receivables), wildly exuberant press releases, or something that leaves a few more “tracks”. Pioneering, by comparison, did not (and currently does not) have inflated revenues or receivables, and had few press releases over the last year. This, to quote a former Secretary of Defence, was what you might call one of the “unknown unknowns”, or at least it was to me. In any case, there’s another quote that’s probably applicable here, and that is the fact that it serves little purpose to cry over spilled milk. At this point, one must determine what to do next.
What now ? Regardless of the fact that this particular company has caused some severe indigestion, the starting point is still the same: what can one glean from the technicals, the fundamentals, and the market outlook. Once these have been assessed, then one can make a reasoned decision how to proceed. Please note that despite the change to a more “formal” report format, we continue to use green, red, and amber text to highlight particular issues as being positive, negative, or neutral to the investment thesis.
The Technical Perspective: Moving averages are slowly converging. While I generally do not consider myself to be a technician, I do pay attention to moving averages to get a feel for what the current sentiment is like. As one can see from the 3 year chart below, PTE has retraced all of the gains that were made since 2016, and is basically right back where it started from. At this time (February of 2019), the takeaway is that both the 10 and 30 week MAVGs are slowly converging once again. Financials for Q1 are less than a week away, and if (yes, that is an enormous “if”) PTE can show some significant positive progress, one could see some price strength, and the 10 week MAVG could conceivably cross over the 30 week MAVG. However, you will note the heavy use of the words if and could in those prior sentences. Things will, for once, have to get better rather than worse – which is probably a good segue into fundamentals.
The Fundamental Perspective: There’s no debt – but there’s not much cash either. On page 6 of the latest MD&A, PTE indicates that they have $2.30 MM in cash and investments as of January 28th 2019. As per the year end financials, they had (as of Sept. 30th 2018) $3.66 MM in cash and investments. This suggests that they burned $1.36 MM from Oct. 01 2018 to Jan. 28th 2019, a total of 120 days. The very simple math here is that if they cannot get traction with sales, they will burn through their entire cash position in approximately 6 ½ months, or about the middle of August of 2019. While it is obviously impossible to project the exact cash burn rate, this is reasonably close to the high estimate of cash burn that was originally made back in September of 2018. At that time, with $5.70 MM of cash and investments (as per financials dated June 30 2018), it was estimated that the entire cash position could be gone by October of 2019.
Receivables are not out of control. The classic kiss of death, an enormous receivables balance that is going to be collected “any time now” is not present. Additionally, the vast majority of receivables are current (as shown below), which at least provides some comfort that no AR write offs have yet to occur.
Inventory isn’t out of control – but it is big. As of January 28th 2019, page 6 of the MD&A states that PTE has roughly $8.0 MM of current assets. Given that total liabilities are a paltry $1.38 MM, and there is no long term debt, this should be music to our ears. It is – sort of. The fact of the matter is that $4.1 MM of these current assets is finished goods inventory (see below), and sales have been slow. While it is true that this inventory isn’t perishable, if there is even the slightest chance that this inventory is in question, it puts the entire company at risk. If sales had not dropped so precipitously, we probably wouldn’t even mention inventory. However, given that sales have been slowing down rather than speeding up (or staying flat), we would be foolish not to be aware of this situation.
G&A expenses have stayed in line with estimates. When we previously reviewed PTE Q3 statements, we estimated that full year G&A costs (including non-cash expenses) should come in around $6.0 MM. Thankfully, this was indeed the case, with full year G&A costs coming in at $6.07 MM. When one adjusts for non-cash expenses, full year G&A cash costs came in at $4.78 MM. While these are up from last year, our concern was that they would continue to increase as the fiscal year progressed, further damaging an already tenuous situation.
Tangible book value is solid – for now.At the time of writing this (February 2019), PTE book value comes in at about $0.15 per share after adjusting for cash burn up to the end of January 2019. So, the optimist would say that at a $0.10 price, one is purchasing the company at a 33% discount to tangible value. Additionally, if one looks at PTE in a net-net context, it is still a bargain, as the net-net value per share, also adjusting for cash burn up to the end of January, is $0.11 per share.
However, it’s no great secret that cash burn, if it doesn’t stop, will eventually scare away even the most hardened of value investors. With this in mind, the table below encapsulates what the tangible value of PTE would look like if the bleeding doesn’t stop. We assume that PTE continues to burn cash at the same rate as it did in the 4 month period from the end of September 2018 through to the end of January 2019, approximately $340,000 per month.
As one can see, depending on what one believes, today’s price is either a bargain or a value trap. Given the unfortunate fact that results to date have been poor and the company is currently dealing with its own internal strife, I would not fault investors for cutting bait, as it is difficult to determine whether that light in the distance is the break of dawn or an approaching train. On the other hand, those investors that are extremely patient and extremely risk tolerant will make the astute observation that outsized returns often come in murky, opaque packages. To be clear, the current situation is exactly that.
Outlook – what does the future hold ? PTE needs to repeat or improve on 2017 sales. In fiscal 2017, PTE revenues came in at $10.28 MM with a 50% gross margin. While this is a far cry from 2018 revenues, the fact that it did indeed occur suggests that it’s not impossible, hence the amber color of this section – it’s not impossible, but recent results aren’t exactly screaming that it will.
With their current cost structure, $10 MM seems to be the low water mark to achieve a cash flow neutral state, assuming 50% gross margin and cash G&A costs of approximately $5.0 MM.
Gross margins are a concern. On page 6 of the most recent MD&A, one can read the following:
Those last two sentences are a very clear signal that the 50% gross margins that we see today could very well change – and possibly not for the better.
Increased sales are (theoretically) around the corner. The company makes the following statement on page 5 of the MD&A (below):
The use of words like “traction”, “increased”, “repeat”, and “growing” are strong words, and their use here is interesting. Whereas comments in the MD&A for prior quarters made clear reference to longer sales cycles, there has never been the use of words as pointed as these. This creates a bit of a perplexing situation for us, as on one hand there are clear signals that margins may suffer, whereas here there is a very strong signal that sales should improve. With all of that in mind, until actual results manifest themselves in a tangible way, we remain neutral on statements such as this.
The market opportunity is still there. Some of you may recall a statement made previously, which is repeated here: The market opportunity of over 40 million rental units (https://www.nmhc.org/research-insight/quick-facts-figures/quick-facts-resident-demographics/) is still sitting there. PTE doesn’t need to sell to every single one of them, but it does have to sell to more of them. The problem of kitchen fires is still one that landlords would like to reduce or eliminate, and until that changes, the Smartburner should still be something of interest to them.
Finally – what action are we taking ? We continue to hold PTE – and may even add at these levels. This statement may sound surprising, but it must be viewed within the context of an entire portfolio of companies such as these. Bear in mind that our original position in PTE was initiated at prices similar to what we are seeing today, not at the much higher prices that we saw in 2016 and 2017. While it is very difficult to buy (or even hold) when negativity is so prevalent, it is also the time when everyone else has thrown in the towel. Additionally, while it may be irrelevant to the overall investment thesis, it is nonetheless interesting to note that investment firms with much larger pockets (and audiences) than us issued “Buy” recommendations in 2017, at a time when optimism was at its highest, and leading some investors to buy in close to the peak. Our approach is somewhat different.
To provide some more context, we maintain positions in 10 to 20 small and micro cap companies which we believe may provide very significant upside. Because of our focus on these small (and volatile) companies, we know that we may be subject to larger than normal swings, which goes with the territory. When things get good, they can be very, very good – and when things get bad, the same applies.
In closing, we would say that any investor contemplating a long position in PTE should be extremely risk tolerant, and extremely patient, as it is unlikely that any turnaround will manifest itself over night. As always, if you have comments or opinions, please feel to send an email or leave a comment via the website.
For those of you that have been following this story, you have either thrown in the towel, or are curious as to whether or not this company is alive (or not). Since publishing the initial four part series back in June of 2018, the share price of Pioneering has managed to shed even more value. Anyone that purchased in June of 2018 (or prior to Q3) has lost money, and in no small measure.
Recently I received an email which was basically a “what now” kind of query. Which is why I am following up with this post. For ease of reading, and so that readers can skip to those areas that are of particular interest to them, I’ve decided to follow a point form format. Here goes….
Are you (Grey Swan) still long on PTE, and have you purchased more ? Yes, I am still long, and I have (at these prices) purchased more.
OK. You are still long, and have bought more. Are you insane? That depends on how you view your investment horizon. I tend to have a long hold period (less than 2 years is very short for me), and have held things as long as 10+ years. My most successful investment spanned an 8 year period. During that time, depending on when I might have sold, I could have lost ~ 65%. When I did eventually sell, I ended with a 1200% gain on the entire position, and that was before the shares peaked. The final tranche of shares that I sold realized a gain of 2600%. All that is to say that I am “crazy” by the standards of those who have short investment horizons, but perhaps not crazy for those that have long time horizons.
Why did I buy more shares ? The company is, without a doubt, missing short term revenue targets, and the market is punishing it severely. However, a quick rundown of the Q3 financials provides the following information:
There is no debt on the balance sheet: No debt means that insolvency risk is about as close to zero as one can get.
G&A expenses have remained static: Total G&A expense for the 3 and 9 months ended June 2018 was $1.5 MM and $4.5 MM respectively. One of the things I was looking for in these statements was no further growth in G&A. The fact that both of these, when extrapolated over 1 year, end up at the same place ($6.0 MM) is a good thing. This suggests to me that the G&A structure is basically “in place”, and that we hopefully shouldn’t see further growth in overhead.
Cash + short term investments aren’t all gone: The company has $5.7 MM in cash and short term investments. For the 3 months ended June 2018, they burned $1.07 MM, and for the 9 months they burned $2.02 MM. If we assume they continue to burn cash (and essentially cannot sell significant product volumes) at the 3 month burn rate, then they will use up their entire cash position in about 16 months. If this does indeed occur, then I will be losing a significant amount of money, and I will be eating more than my share of humble pie. However, I believe management is highly incented to make sure this does not happen. Which brings me to my next point.
Management still owns a significant number of shares: If you add up the 5 largest holdings of individual insiders (Dueck, Paterson, Pavan, Callahan, & Shah) they total ~ 23 MM shares, or about 35% of the fully diluted share count of 64.5 MM shares. While it is probably true that these guys are all (likely) wealthier than you or I, they too have “felt the pain”. Collectively, this group of insiders has “lost” a combined ~ $31 MM ($1.50 peak price – $0.15 price today). You can imagine that they are likely very interested in seeing the share price move back in the right direction.
UL 858 compliance isn’t sexy: When was the last time you were at a cocktail party and someone wanted to talk to you about “a safer stove”. My guess is never. The concept that PTE is selling (kitchen fire safety) and the niches that it is targeting (Seniors, University, Co-op housing) are boring. Consumer awareness of this issue is still close to zero, as “compliant” stoves likely won’t show up in showrooms till some time in 2019. This story is not blockchain or cannabis, and that being the case, many investors will not become re-engaged with it until the financial results start telling a different story. In the meantime, I would expect that we will see a flat-lined technical chart at best.
UL 858 compliance isn’t sexy, but someone is still noticing: There were three recent press releases regarding partnerships with HPN select (purchasing group for Co-op housing), Millers Mutual (insurance company providing insurance discounts), and Buyers Access (purchasing group for multi-family housing). I would imagine that large organizations such as these don’t sit around and draw straws to see “who should we partner with” or “what should we provide an insurance discount for”. These are decisions that have to pass through various levels of decision making before they get the green light, and only then after they determine that this will also be good for their organization, not just Pioneering. When the purchasing group you deal with carries a product, you (as a multi-family landlord) are far more likely to buy it – which in the long run means more sales.
The opportunity is still there: If you do a quick Google search on “how many multi-family housing units in the USA” you will get a number of different answers. If you believe the U.S. Energy Information Administration, the number is around 16.5 MM, and that was in 2005. If you think the National Multi Housing Council is right, then the number is 17.8 MM. For the sake of clarity, these number represent the number of buildings that house 5 or more units. If you are include all rental stock, then this number is closer to 40 MM. These units aren’t going anywhere anytime soon – they are still sitting there. Granted, everyone won’t want to buy a “Smart burner”, but it stands to reason that some will.
The company is priced for oblivion. Right now (Q4 2018), at a share price of $0.14, the company has a market cap (using basic shares outstanding) of $7.2 MM. Adjusting for cash on the balance sheet, this implies an Enterprise value of $1.5 MM. If the product that Pioneering is offering is truly useless, and nobody wants to buy it, then this valuation is correct. In turn, if that is correct, then organizations such as HPN Select, Buyers Access, and Millers Mutual have made some very poor decisions. However, my guess is that someone out there finds value in the concept of reduced risk of fire, and in turn, a reduction in related issues such as false alarms and property damage. Like a lot of other shareholders, I’m just going to have to wait.
As always, these are only my thoughts and opinions. If you have questions or comments, I can be reached at: mark@grey-swan.com.
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):
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%.”
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.
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).
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:
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” wasif 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.
Part 1 of this series reviewed recent share price activity.
PTE went from ~ $0.20 to $1.50 – and back again as of May 2018.
Recent revenue misses have caused massive selling pressure.
However, balance sheet is rock solid, with no insolvency risk.
Investment thesis boils down to one issue: can PTE increase sales.
In Part 1 of our review, we took a look at the activity of Pioneering common shares from 2016 through to May of 2018, and how they came to run from under $.20 to a high of $1.50 – and back. In this segment, we take a look at how good (or bad) the company is today, after having given up virtually all of its gains over the last few years. Essentially , is the company worse today than it was yesterday ?
To answer this question, we look first at the most recent financial statements of Pioneering (6 months up to March 31 2018) versus the financials immediately before the February 2017 financing (Audited 2016), beginning with the balance sheet:
Using the basic share count, what becomes clear from this comparison is that the company today is debt free and has ~ $0.12/ share in cash and short term investments. Before the financing, Pioneering had $1.3 MM in long term debt and had only $0.07/share in cash. Additionally, the 23.6 current ratio today is significantly improved over the current ratio of 1.47 of December 2016. In terms of potential bankruptcy risk and capital structure, the company is in a much better position today.
This being said, any rational investor would question how long cash reserves can last. Based on the most recent 6 month period (October 01 2017 – March 31 2018) & 3 month period (Jan 01 2018 – March 31 2018) we can see that Pioneering burned $0.954 MM & $1.284 MM respectively, including all changes in working capital. While we don’t know which one of these is indicative of the future, we can assume that the future cash burn could be anywhere between $428,000 / month (using the 3 month value), or as low as $159,000 / month (using the 6 month value), or an average of $293,500 per month.
Now that we have an understanding of what the cash burn looks like, if we then assume that Pioneering continues to sell at these depressed levels, then the company could continue to operate, without requiring incremental financing, for somewhere between 16 months ($6.8 MM / $428,000) and 43 months ($6.8 MM / $159,000). In essence, both the balance sheet and the cash flow statement confirm that insolvency risk is not an issue, and that dilution via further share issuance is unlikely in the near future.
While a clean balance sheet and cash in the bank are always nice to have, we should also take a look at the income statement to understand how revenues and expenses have changed over this period of time (below).
At first glance, a few things are immediately apparent. Gross margins have deteriorated, from an average of 66% in 2015 and 2016 versus a significantly lower 52%-53% in 2018. While this is clearly “not good”, gross margins of over 50% are still very robust. It is possible that a significant portion of this deterioration is attributable to the move to large distributors (Wilmar, HD Supply, & Staples), as larger distributors may agree to purchase larger volumes, but at a somewhat reduced price. With this in mind, we will assume the lower gross margins are here to stay. Additionally, one can see that G&A costs have increased significantly, from full year 2016 costs of $3.39 MM to forecast 2018 costs of between $5.9 MM to $6.5 MM.
The increase in costs are not entirely unexpected. We should recall that the companies push into the (very large) US market is a fairly new development, and significantly increases their exposure – and potential sales. As the saying goes, “there is no free lunch”, and it is reasonable to expect some increase in G&A to go along with the anticipated increase in future sales. Additionally, some of the G&A costs noted for both 2016 and YTD 2018 include non-cash charges. We are not referring to DD&A, as these costs are less than $30,000 annually. Rather, we are referring to non-cash compensation expenses that are buried in other G&A line items. Extracts from the notes to the financial statements (below) show the total non-cash charges for each period:
Adjusting for these values, this means that actual cash costs for fiscal 2016 and YTD 2018 come in at $2.80 MM and $2.34 MM respectively. If we then assume that the $614,472 of non-cash costs for the first 6 months of 2018 were evenly distributed throughout the 6 month period, we can then annualize both 6 month and 3 month G&A costs, which gives us a full year estimate for 2018 of somewhere between $4.69 MM and $5.30 MM.
So, after review of all available financial information, we can make the following assertions:
Balance sheet has been de-risked, with significant cash on hand and no long term debt.
Company has no insolvency risk, and should not require a capital raise for some time.
Company can operate at current “depressed” sales level for 16 to 43 months.
Gross margin has deteriorated from ~ 66% to ~ 52%.
Some of this deterioration may be explained by the move to larger distributors.
G&A is significantly higher, even after adjusting for all non-cash charges.
However, this too may be a function of the company adjusting cost structure for larger future sales volumes.
While it is clear that PTE shares won’t be hitting $0.00 soon, our original question is only 1/2 answered. While insolvency is a non-issue, & the balance sheet is significantly improved, the income statement appears to be “less improved” at the very least, if not worse. We are still left wondering, is this glass half full, or half empty ?
To answer this question, we first have to determine if Pioneering will be able to actually sell increased Smart Burner volumes, and if so, when. This is perhaps the key to the PTE story, and this is exactly what we will discuss in Part 3.
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 ?
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 mark@grey-swan.com..
