PFIE

Investment Analysis Clubs Saul’s Investing Discussions
1

There is high volume and a drop in PFIE today but I cannot locate any news. Anyone able to find anything on this or just an opportunity to add?

Rickey

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2

Rickey,

I added this morning at $5.01 and then again at $4.58. Have a 2.5% position now.

Chris

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Just found a Zack’s article, so answered my own question.

Rickey

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Chris,

Thanks. Added some as well.

Rickey

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Rickey,

On ETrade there is a snippet under the news section for this stock that reads as follows:

Today, June 25, 2014
Profire Energy Files to Offer Up to $34.5M of Stock
Dow Jones

There is no associated article, other than this headline, and I could not find anything online, despite using my best google-fu. So take it with a grain of salt, as they say.

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6

So, I know it’s generally bad form to reply to yourself, but MF doesn’t have an edit option, so here goes…

What would it mean for the stock price if PFIE was indeed looking to offer more stock? I would think that would drive the price down, but I’m thinking of this in a supply vs demand sense, which could be completely off base in regard to stock.

Can anyone elucidate here?

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>What would it mean for the stock price if PFIE was indeed looking to offer more stock? I would think that would drive the price down, but I’m thinking of this in a supply vs demand sense, which could be completely off base in regard to stock.

PFIE had about 47M shares (fully diluted) as of 12/31/2013. If they raise $34.5M at $4.50 per share then there will be 7.66M more shares for a total of 54.7M shares. They will also have $32.7M more (typically there is about a 5% cost to raising the money) on the balance sheet which they will presumably be used to grow their business more than they can now. So there are several reasons why a company might raise cash.

  1. Cash flow generation from operating activities is insufficient to support growth because growth is too fast.

  2. Cash flow generation is insufficient because the revenue base is too small to generate enough cash to support demand (similar to #1). This can happen because the company hasn’t scaled enough to cover fixed costs (need to grow sales to get operating leverage).

  3. Cash flow generation is insufficient because margins are too low. This would be a problem because increasing sales will not help much if margins are too low.

  4. The company wants to make an acquisition.

Chris

Chris

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I saw the same thing on Schwab that someone else saw elsewhere. They filed to sell $35 million of stock, which would dilute the stock but provide the company with more money, and if they use it well, the additional money should help bring in more revenue and earnings.

Saul

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I added some at $4.52 too.

Saul

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I started a small position at $4.52.

Neil

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I started a small position at $4.65.

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For what it is worth.

I was reading the co’s annual report for fiscal year ending 3/2013 - the current year report is not available yet. Here are some of the findings

  1. The insiders own 84% of the common stocks
  2. The CFO had settled a security violation case - violation occurred in 2004-2008 time frame. As part of the settlement he was banned from security/investment related business for a year before he can reapply for licenses. Co determined it as an unrelated incident and believed that CFO was capable of performing the duty as CFO.
  3. The co’s management identified material weakness in internal control over financial reporting, which didn’t impact existing financial statements but may impact future financial reporting. The weakness is due to lack of functioning audit committee, lack of independent directors and lack of segregation of duties. The co will correct the weakness by adding more resources as funds become available.
  4. The co increased head counts by 50% during 2013 fiscal year to about 50 employees.
  5. The co had 37% of the business came from 4 customers in 2013 and 52% from the same 4 customers in 2012.

regards.
-M

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Hi mview, I have some comments on your points:

1) The insiders own 84% of the common stocks

That’s generally considered good news as it insures that their interests are aligned with ours.

5) The co had 37% of the business came from 4 customers in 2013 and 52% from the same 4 customers in 2012.

Good news. They are diversifying, and reducing dependence on top four customers.

4) The co increased head count by 50% during 2013 fiscal year to about 50 employees.

Great news. Revenue was up about 150% and net income was up over 400% so an increase in headcount of 50% was well warranted. Here’s the note from the last quarterly report.

The Company reported record quarterly revenue for the three months ended December 31, 2013 of $9,530,837, and net income (after-tax) of $1,206,306, respectively. These figures represent a 169% increase in revenue and a 470% increase in net income (after-tax) compared to the same period of the prior fiscal year. … As a percentage of revenues, total operating expenses fell from 75% to 33%.

Note that total operating expenses fell from 75% of revenues to 33%. You don’t get better news than that.

3) The co’s management identified material weakness in internal control over financial reporting, which didn’t impact existing financial statements but may impact future financial reporting. The weakness is due to lack of functioning audit committee, lack of independent directors and lack of segregation of duties. The co will correct the weakness by adding more resources as funds become available.

They say they are doing the best they can with what they have, and will do better, but that weakness in controls hasn’t affected existing financial statements. (It may have slowed up their audited end of year reporting though).

2) The CFO had settled a security violation case - violation occurred in 2004-2008 time frame. As part of the settlement he was banned from security/investment related business for a year before he can reapply for licenses. Co determined it as an unrelated incident and believed that CFO was capable of performing the duty as CFO.

We don’t know what it was all about but it can’t have been too serious. I’ve never heard of anyone getting just a 1-year ban. Usually it’s for life, or 20 years, or something like that. I’ll trust management’s judgment for now.

Best,

Saul

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I agree with your assessment. Overall it is more positive than negative. I particularly like the sizable insider holding, though I have not checked the amount of insider transactions, if there are any.

The weak internal control is something to watch. The good part is that they have identified it before things get bad.

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I added some at $4.52 too.

Saul

Hey Saul,

I seem to always be reading that you added here or added there, for context, could you tell us what that means? More specifically, when you buy, how much is it usually? .1% or .5% or 1% etc…?

Thanks.

Jeb

BTW, you’re killing it on this board!

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“I added some at $4.52 too.”

Hey Saul, I seem to always be reading that you added here or added there, for context, could you tell us what that means? More specifically, when you buy, how much is it usually? .1% or .5% or 1% etc….?

Hi Jeb, There is no usually. I’d have to say “It depends (on a lot of things)”. With regards to the PFIE purchase that I just mentioned, I increased it from 3.5 to 3.7% of my total (thus it was about two tenths of a percent).

Saul

1 Like