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.