Hi all, a bit late to the party but I thought I’d put together my two cents from the SIRC 10Q for the period ending 6/30/2022. Without further ado…
Revenue growth, I’ll be honest, is still jaw dropping to me. We’re looking at about 8.5x growth quarter over quarter which is insanely good. If this doesn’t fill you up with confidence in SIRC, I don’t know what else will. The sales team is doing some incredible work out there, from the massive expansion in the residential solar business to the continued strength of the relatively newer construction business.
All of this being said, we of course cannot expect 8.5x returns indefinitely. Five years in a row of 8.5x returns and we’d be at above 2.7 trillion dollars of quarterly revenue. This, of course is obnoxious…Inflation’s bad, but not that bad! Look for this to start tapering down a bit once SIRC enters a more mature stage, but for now just marvel at the returns.
At a gross level, SIRC is still maintaining a strong healthy gross margin of around 45%. This is about where I’d expect SIRC to remain as it matures, I’d even expect it to get better as purchasing power increases. This is roughly what we see for a more mature company performing similar types of sales and distribution.
At an operating margin level, I am still floored at how high of an operating margin they can achieve: 32% for the quarter and 29% YTD. That is unbelievably good for a sales, distribution, and installation company. I’ve said it in past articles, I’m expecting that margin to come back down to somewhere around the 10%-15% once the company matures more.
That being said, we are already seeing operating margins come down a bit. For example, Q3 2021’s (period ended Nov 30 using their old FYE) operating margin was around 37%, which is even crazier. But we are seeing them come down some. I would expect this change to happen gradually, and we end up around that 10-15% range I outlined before.
Cash flow has been the constant thorn in the side of SIRC ever since it started gathering this momentum around a year ago. Remember, with our lovely accounting conventions, we have SIRC start to recognize revenue very early as their business is mostly project based. However, it can take months to collect on this revenue. Couple that with generally longer payment days in industry per the CEO, and we can a get company with 27m in operating income, but negative cash flow.
I’ve said this the last few quarters, but it’s going to take some time before this evens out and we start seeing cash flow collection catch up with revenue. It’s just a function of very high recognized revenue relative to past quarters. So there will be relief, not to worry. But it may take until the end of the year before positive cash flow starts.
This is also evident in their financing activities, which I will get to, as they are still issuing new shares and taking on small, short-term debt, to finance the business as a bridge until operations cash comes in.
All in all, it’s a bit distressing to see negative cash flow. But unless SIRC is committing fraud and that revenue isn’t real, there isn’t too much to worry about. It’s just a speed bump.
Financing and Dilution
Onto financing. I’m not going to beat the Arbiter dead horse or any other bank, but we clearly have not seen that large amount of debt financing come in yet. That being said, on the cash flow issue front, SIRC has bridged that gap through some minimal share issuances and short-term debt. Nothing to worry about, but it’s clear that even into Q3 they are still needing some bridge money.
On the dilution front, we’ve seen a few sources of dilution. The biggest chunk of dilution before the end of the quarter was stock comp either related to an acquisition or direct to their salespeople. All of this was pretty minimal, but dilution, nonetheless. Specifically on the salespeople, if those people keep churning out revenue figures like they have been I don’t care if they keep getting that kind of stock comp…
If we flip to the subsequent events, we see more of the same: a bit of dilution for stock comp, cash, services, and a bit of debt service. However, we see another big chunk, 25m shares, shelled out for convertible debt. This was basically part of the refinancing of their toxic convertible debt, so I’m not seeing too many issues here… which leads me to…
I got a nice smile on my face when I saw that ever so famous OTCMarkets chart showing their convertible debt. That is the cleanest I’ve ever seen it… I barely even consider that convertible debt given how high the conversion prices are.
So yes, there has been a bit more dilution, but this was all pain that was expected. It looks like it’s pretty much over now… the biggest form of dilution remains the Preferred B shares, but expect those to be the first shares bought back once the company becomes cash flow positive.
Of course, one thing I must point out as it wasn’t listed in the 10Q, the company just cancelled 53m shares as part of the lawsuit settlement with Hunter Ballew. So that was a huge win 😊.
I wanted to focus on the big-ticket financial items, but there were a few more minor points I wanted to discuss:
- Allowance for doubtful accounts in their AR remains very low, only around 40k. So clearly they think it’s all collectible!
- When we look at their segmented data, it’s incredible how much money they make in the residential sector. I expect commercial will be a bigger breadwinner for the company long term, albeit at a lower margin so far. But man their margins in residential are insane, expect those to tighten over time.
- Don’t sleep on EV charging. It’s been relatively quiet so far at only 1.8m in revenue for the past six months, but I have high hopes for EV charging given the current political climate in the southwest US particularly. As EV’s become more affordable, ordinary people will have more of an opportunity to supplement their car with a solar charging station… but that’s a discussion for another day!
- No more warrants outstanding 😊
- Still no preferred dividends paid from the Class C and Class D from what I can tell. Looking for more detail there going forward.
- Form 10 – not out as I write this… but I am excited 😊
Brett Rosen Shoutout
Lastly, I want to shoutout RB Capital and Brett Rosen. I don’t always agree with what he has to say when it comes to investing, etc. But I cannot deny that the man is a huge friend to OTC companies, and we are all better for having him around. The man gives out extremely friendly debt terms to companies he believes in and takes a disproportionate risk on their behalf.
For example, you’d get laughed out of the lobby of Goldman if you suggested to them to lend $8m at 5% with a conversion price of 3.00 to SIRC in February 2021. Remember. This was during the great pump and dump of 2021, and SIRC was still a fledgling company hemorrhaging losses. But what does Brett do? He doesn’t issue them some garbage convertible debt at 15% interest and a conversion price of 0.001. He gives them debt that some NASDAQ listed companies would struggle to get from a traditional debt issuance.
So while I don’t agree with every company he invests in, the man clearly puts a ton of faith in his OTC picks and wants to see them succeed for the sake of EVERYBODY, not just himself like the sleezeball toxic debt issuers.
Anyways, I’ll end there this time. Thanks for reading and I’ll catch you next time!
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DISCLAIMER – AT THE TIME OF WRITING THIS ARTICLE I HAVE A LONG POSITION IN $SIRC. THIS ARTICLE IS NOT FINANCIAL ADVICE AND IS INTENDED ONLY FOR EDUCATIONAL PURPOSES. I AM NOT A FINANCIAL ADVISOR.