YouTube commentary: https://youtu.be/7vQxFIlCTEY
Hello everyone! There has been a flurry of activity the last few days, and of course it happens when I am gone on vacation. But I am back now and wanted to prioritize getting my SIRC analysis out for the 2023 Q1 quarterly filing.
There is A LOT to talk about, so this is going to be accompanied by a video to give the proper discussion. Given that, I’ll try to hit the high points with a bit more detail in this video and then rapid fire through everything else.
I’ll follow this outline:
- General Impressions
- Income Statement
- Balance Sheet
- Cash Flow and Financing
- Looking Forward
- Major Concerns and Gripes
- CEO Resignation
This is going to be negative. I have a long position in SIRC and have no plans to sell, I would disclose if I ever did. So I am kind of dumb for writing such a negative article about what I invest in… but it is what it is!
Before I start, recall that this is a backwards looking filing. The business is already 45 days after the end of the quarter, so keep that in mind as we read and just know that things may have improved, but maybe not!
In general, this was an ugly filing. Q1 was not kind to SIRC from strictly a financial statement and reporting perspective. There are some bright spots, but all of them are highly speculative and are rooted in forward looking sentiment, not tangible past performance.
The good things really revolve around their potential sales pipeline and recent financing a la RB Capital which allegedly helps them realize it. Again, very speculative and we’ve heard this story for the last nine plus months. Right now, the story is that there is a 379m pipeline to be fulfilled in the next 12 months – which is quite the tall order.
So could things improve? Sure. But nothing about SIRC’s track record has told me that they will get it done. At this point, it’s a complete blind guess as to whether they convert their massive sales pipeline or they go bankrupt.
Speaking of bankrupt… the bad was everywhere in this report. They had zero (not a typo) cash in the bank, are diluting like crazy to make debt/interest payments, are still getting short term loans to meet basic operating cash flow needs, and their WIP receivable continues to grow with nothing to show for it.
As of March 31, it was DIRE at SIRC. We don’t have sufficient detail on where the business is now as of mid-May. But we can make some educated guesses – more to come there.
Those are the high points – let’s get into more detail.
An Aside on WIP Receivables
I’m going to mention this a lot, so I want to recap. A WIP (work in progress) receivable is derived from some amount of revenue SIRC has “earned” from performing certain performance milestones in their projects. This is very common in project-based companies, like construction, consulting, etc.
Let’s use an oversimplified example. Say I sell a 100m construction project that is completed over five stages. I follow US GAAP, and as I meet those milestones, I accrue revenue and associated costs of the project. Let’s say I hit the first milestone and accrue 20m of the 100m in revenue and some amount of expense.
I can’t actually bill for this 20m yet as I’m not contractually able to until I finish the project or some later stage. But I had to recognize revenue and my ability to be paid in the future isn’t in question. So for now, I put it in a WIP receivable which is netted against whatever my estimate expense was.
The idea is that I will collect on this later once I finish the project and it is converted to a trade receivable and eventually cash.
The issue with SIRC as that they’ve booked so much revenue via a WIP receivable which cannot be converted to a trade receivable because they don’t have money to move projects forward. I’m speculating, but they need cash up front for materials, equipment, labor, etc. that is more than made up for later. But if you don’t have the cash now, it’s not possible to move forward.
Therein lies the issue with SIRC and has caused the share price to collapse the last six months or so.
Operationally, SIRC continues to rely on its commercial business to generate book profits and revenue. Solar residential, roofing, EV’s, etc. are currently a drag to earnings. So when we talk about SIRC’s near-term future, it’s all commercial. That’s where the margins are, but also that hefty WIP receivable that they’re having trouble pushing through to a billable phase.
Because of this, I don’t put a ton of stock (pun intended) on their income statement. So they had 21m of revenue, 1.8m of income from ops, and broke even at net income. But as we’ll get to below in cash flow, book revenue and profits don’t mean anything if they’re potentially noncollectable and are sitting in a WIP receivable.
We’ll get into the “why” as we get to the cash flow statement and financing section. But their balance sheet is a complete disaster. I will note that currently it is not as bad as it looked at Q1, most notably with the Granite note of 14m being converted out.
So where does that leave us?
SIRC is nearly insolvent and is going to need a small miracle to meet their current (next 12 months) cash flow needs.
First, working capital is theoretically overstated as the current picture has a 77m WIP receivable. Remember, the company claims cannot be collected until projects are completed and can be billed. But they cannot complete these projects because they cannot get financing.
You see the problem.
Now, the company has also claimed they have received some or all of the financing they need to advance them, such as the Calaway Farms project. However, we have no guarantee and track record is not in our favor.
Coming back to working capital, without the WIP receivable and their dubious ability to ever convert it to cash, we are left with a massive cash shortfall. Current assets less the WIP receivable are about 7m, and 4.3m of that is a note receivable from Arbiter… So let’s call it realistically current assets of 3m.
They have current liabilities coming due in the next 12 months of 53m per this report. But we can adjust out 14m from Granite, so that’s 39m. Most of the remaining current liabilities are accounts payable (not for WIP though, those are netted from the WIP receivable) and short-term debt.
In short then, without a significant amount of the 77m WIP receivable being converted to cash in the next 6-9 months, SIRC is finished.
Cash Flow Statement and Financing
Here is where we get the “why” of all of their issues. Refer above to the discussion of WIP receivables – we’re seeing that they still are not positive cash flowing because too much of their revenue is thrown to WIP receivables.
While not as bad as previous quarters (likely because of their revenue drop), we had about break-even net income. But due primarily to a rising total AR balance of 3.2m, they had a 2.7m cash shortfall in the quarter.
This was even after book-to-cash relief from stock comp, amortized debt discounts, other non-cash finance losses, etc.
To make up this cash shortfall, they primarily took out short term toxic convertible debt, loan shark notes, and issued more shares in exchange for cash. Oh, and they spent every last dollar in their bank account.
I’m honestly amazed they made payroll all three months, or maybe they didn’t even do that?
The convertible notes were all toxic except for an RB Capital note (more on them later) of 1m. The others, while smaller at around 400k in total, have hefty conversion discounts to market.
The non-convertible notes were what I’d call “loan shark” level with short terms, interest rates of 25%, and one had DAILY payments. That’s right, DAILY. Ouch. The only time you see daily payments are for a combination of desperate company and a lender who is not very confident of ever getting paid back.
On the conversions and dilution front, it was VERY bad. They issued around 180m shares with nothing really to show for it other than “we kept the lights on”. Some notable low-lights included:
- RB Capital converted 380k in accrued interest into 38m shares, so a 0.01 price which is a hefty discount to market. Was a 75% discount to market.
- There is also a typo on Pg. 36 – they have the conversion price at 0.001, not 0.01.
- 40m shares for more debt they couldn’t repay to Continuation Capital at a 50% discount to market at the time (March 16/17)
- 36m to Granite for cash at a 50% discount to market at the time.
That covers about 120m of the 180m… I’ll leave it at that.
So let’s just wrap it up by saying that Q1 was horrific in terms of cash flow, and they seemed to be on the verge of closing up shop the entire time. But they’re still around, which I guess is a good sign?
Speaking of them still being around… they’re still around. So that means since this report came out, they have been able to meet payroll and continue operations.
What we do know is what is outlined in the Subsequent Events section. We are seeing more and more dilution to pay off debt in addition to Granite, stock compensation (probably because they have no money), and more conversions.
We also have RB Capital giving another 500k which was allegedly used to move projects, but I’ll believe it when I see it on paper at this point.
So it’s only halfway through the quarter and we’ve seen another 145m of dilution for “keeping the lights on” activity.
Let me be clear on one thing, and I’ll discuss one issue with this below, but the Granite debt conversion in totality was good for wiping clean the 14m owed. But more on that.
So nothing about this filing nor the subsequent events tell me that SIRC is cash flow positive right now. So I am seriously doubting Q2 will be cash flow positive and that they will have moved their pipeline along enough.
Right now, Q3 seems like the earliest possibility in my opinion, if they can even make it that long. At this point, we just need to watch for PR’s and hope for the best.
Major Issues and Gripes
I read a few things in here that made me a little upset and I think deserve some sort of explanation. The fact that accompanying PR hasn’t come out yet with this is disappointing. We need more context.
Here they are.
Granite Conversion Deal
This is the exact PR we received.
The language we got in the Q1 report was this:
“On April 14, 2023, the Company executed Amendment to Amended and Reins Buy Out Agreement dated June 27, 2022 with granite Global Value Investments Ltd. Where Granite Global shall convert $30,000 of their convertible note into 30,000,000 unrestricted common shares and all debt the Company owes Granite shall be cancelled except for a remaining balance of $127,500.”
THIS IS COMPLETELY DIFFERENT TO WHAT THE PR SAYS.
To translate – what they’re saying is that Granite had 30k in debt left that was convertible into 30m common shares. Post this conversion, all other debt (the 14m) is forgiven. How is that anything like “4m common shares for 14m”. I’m sorry, but why would you release that PR or not correct it. That is blatantly misleading.
Let me be clear, the deal is still good for SIRC. But it is incredibly misleading and not as good as the PR mentioned. I honestly feel betrayed as I touted how amazing this deal was, and now I’m finding out that it was not as good as they said it was (even though it was still good on the whole for shareholders).
But the way they communicated it feels very wrong and I don’t like it. I really hope I am missing something here and nothing would make me happier than more context telling my why I’m wrong. So let’s keep an eye out!
I’m probably more forgiving of dilution than most, but some of this dilution is very toxic and warrants an explanation.
First, I’d like to think I have a good relationship with Brett Rosen (I have not spoken to him about this), but the RB Capital conversion of 38m shares at a 75% discount to market for 380k in interest is very questionable without context.
First, RB Capital likes to let convertible debt go past maturity and let interest accrue. Clearly that didn’t happen here.
Why in this case is there a massive conversion at a huge discount for interest? What happened there? Why did the company agree to that? Why did RB Capital do it in the first place? So many questions, but we have no answers… we need context.
Second, this one got me very mad without any context.
“On April 6, 2023, 35,000,000 options were cancelled, and in replacement 35,000,000 shares of common stock issued for compensation.”
Why are they cancelling an OPTION to give the same number of SHARES. It’s an OPTION, that’s the whole point!!! Was this option going to expire worthless and so they just magically made more shares to give this person instead? Was this person going to quit unless they got their shares? How does this make any sense? AHHHHH!!!!!
I sincerely hope they meant they exercised that option and issued shares that way. But I sort of don’t think that’s it…
So bad. And I’m about as forgiving as it gets with dilution.
Common Shares to Series B
Dave converted 37m common shares back into Preferred B at 3.7m shares. Now, all of this is that follows is complete speculation…
Why would he do this? We have no answer from the company yet. My two theories:
To give Dave the benefit of the doubt, he could just be doing this to lower the number of outstanding shares. Which it does, but only by a little.
As a second theory – pessimistic Sam Aker noted that Series B holders have preferred liquidation preference over common shareholders. Meaning, if SIRC goes bankrupt, after debt holders are paid, Series B comes next if there’s anything left.
SO COMPLETELY OBJECTIVELY – If SIRC went bankrupt today, Dave Massey now has a higher liquidation preference.
Whether or not that’s what the main purpose of this was, nobody knows but him. Also, it is likely there will be nothing left after debt holders get their cut anyways. But still, this objectively did happen, so I wanted to point it out. It needs context…
Watch the YouTube video for more on this… but honestly this was needed. We all know he worked very hard for SIRC, but the mistakes piled up and the company clearly has not panned out. It could turn around, but I think a fresh leadership change is needed.
This happens in business, so I don’t necessarily fault the guy. But it’s time for someone new.
I’ll end it here, there’s so much more I could bring up, but these were the high points. All in all, SIRC is in a really bad place and basically everything rests on them pushing their pipeline through in the next six months or so.
The issues are quite obvious, but if you believe they can get it all done, then I guess this is still a potential play? I’m not selling in the off chance they pull it off. But each day that goes by without good news lowers the probability of it happening in my opinion.
Right now, SIRC is just a massive high risk high reward play in my opinion. So I’m not writing them completely off, but there are some serious issues, and this company is about as risky as it gets. But with risk can come reward, let’s not forget that.
Thanks for reading!
Discord Channel: https://discord.gg/kSNKGdwBfJ
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. DO YOUR OWN RESEARCH.