At last, the long awaited event happened. Peak Positioning Technologies (OTCPK:PKKFF) (PKK.C) released its audited 2016 results Friday evening. Revenue was $58.1 million, net loss $2.6 million and a negative EBITDA of about $2 million. This came short of guidance of $100 million in revenue and a positive EBITDA for 2016 which highlights the risk of investing in a start up, even in one that is progressing quite well. I am not the least bit disappointed by this miss in guidance considering the following:
- The company was a shell prior to 2016. In 2015 it had approximately $30,000 in revenue. Even with a 42% miss on revenue guidance, going from $0 million to $58 million in revenue in a year is a huge achievement. Even with razor thin margins.
- The company missed previous guidance on its own accord. Business was purposely delayed so that PKK could get its financial institution subsidiary up and running - Asia Synergy Financial Capital [ASFC] and collect the revenue associated with financing the deals that go through on Gold River in addition to processing them.
- With audited financials out, the business has been proven to be realistic and viable. There was a sense by some of this deal with Jiang Wang being too good to be true. That is no longer the case. When PKK forecasts $500 million in revenue in 2017 and over a billion in revenue in future years, we know that this is achievable. It took just 4.5 months for the company to surpass $50 million in revenue.
- The balance sheet is being cleaned up. As expected, warrants are being exercised and debentures are being converted. PKK has always gotten penalized for having a 700 million fully diluted share count without the resulting benefit of the cash. The company has $320K of debentures remaining and $2 million of other liabilities. That compares to 231.3 million warrants at an average exercise price of 4.7 cents that would bring in $10.9 million.
With the audited results, PKK was still given a going concern clause reflecting the risk of uncertainty of the company's ability to operate in the future. I am optimistic that this will be the last set of audited financials PKK will get with emphasis drawn onto this uncertainty.
Updated guidance for 2017 wasn't given yet. Based on the company's transformation, this is understandable as there is a big unknown as to when ASFC starts operating. We should know from last year that things in China can move more slowly than planned. There will be a conference call on May 8th about Q4 results and the plans for 2017.
Despite making moves towards being a blue chip company by holding its first ever earnings report conference call in Q3 2016, PKK was still given unfair and stupid criticism by naysayers saying that the questions were selected prior to the call. PKK does not have a large following of institutions and sell-side analysts. If it did a Q&A session the traditional way as one would expect in a conference call, there's a good chance management wouldn't get any questions as retail shareholders would be too shy to speak up. So I like the format of the Q&A session as is, at least until PKK can garner more attention from analysts.
What are the risks moving forward? My previous understanding of PKK's goal in China was purely to attack the Fintech space. Now with the creation of ASFC it looks like the company is going to beyond that to having a bank as part of its operations. Becoming a bank from scratch obviously has its own set of challenges - namely garnering sufficient capital and responsible lending of that capital so that the loans don't go bad. We all know how tightly regulated financial services are in Canada and I don't think that would be too different in China.
Luckily PKK's billionaire backer Jiang Wang has tremendous experience in this field and the company is negotiating with financial and insurance companies for investment into a joint venture. With a joint venture would come some kind of revenue sharing plan. We will have to wait and see how this all will unfold, and then we can expect a clearer path going forward.
I believe that the previous target of a 3-5% EBITDA margin on $550 million in revenue will be materially different than actual results for 2017. The company is pivoting towards more profitable operations, but the exact timing of that at this juncture is unclear. I am still confident of my new $0.50 target on PKK since $0.20 was briefly achieved, but it may take a little longer than a year. Unless the business goes exceedingly well, or investors understand and appreciate the PKK story to such an extent that they push the stock price up to a level that implies aggressive valuation multiples.
Disclosure: I am/we are long PKKFF.
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