SIRC – Thoughts on Feb 7 Company Update and Share Price Decline

I wanted to get my thoughts down on the state of SIRC after the recent turmoil and subsequent Q&A the company did. Let’s get right to it.

Disclaimer – I’m long, holding, and I’ve averaged down. But this is not a positive piece on the company. I won’t lie to my readers just because I’m long, I’ll tell it like I see it.

Background

Just to quickly re-hash – in January we had two big negative PR’s in quick succession followed by some positives.

First, there was yet another lawsuit from a former owner of a company SIRC acquired, Kinetic Investments aka Future Home Power. This is becoming quite the common theme for the company. But we have to put this to the side because they had a bigger issue.

Second, the entire company management that was appointed in late 2022: The CEO, CFO, and President of SIRC all resigned on the same day. This was done without explanation until the most recent Q&A and caused the share price to drop about 50%, though it has recovered some (not much).

Dave Massey, the biggest shareholder and former CEO, is now stepping back in as CEO after he stepped aside for the previous management team. He was previously just the Chairman of the Board and continues that role today.

We lastly heard almost immediately afterwards that the company received 35m in funding from a mystery institutions / investors.

Q&A Takeaways

Management Resignation

First and foremost, the explanation around why the entire leadership organization resigned was pretty bland and vague, and to be quite frank I think there’s more to the story. But to avoid conjecture, the exact explanation the company gave was as sort of a non-answer: they said it was a cost savings measure.

They had been restructuring the business the last six months, creating clean divisions in the company and cutting headcount. Evidently Dave, through his decision-making power within the company, decided that the high-paid executives they brought in should also be cut.

For whatever reason, they all resigned. Why? Dave later said that all of the former c-suite executives would be keeping all promised compensation. So my theory is that they negotiated a resignation rather than having the c-suite get terminated, which would have resulted in a legal battle.

The explanation was still incredibly vague, and I think we’ll need to see financial reports to fully understand what that means in terms of stock options, stock comp, cash compensation, etc. that they’re getting. We likely won’t see firm detail until the Q1 2023 10-Q.

My take on this?

Not. Good. I was thinking to myself before writing this article, when is it ever good that your entire c-suite resigns? These were clearly very qualified people that have come and gone within the span of a few months. That really doesn’t inspire much confidence, and it cost the shareholders a ton of money.

The real question is why did they resign? Was it because of cost cutting? Or was it from something else? I won’t allege anything here, but seeing a mass resignation like that leaves that lingering feeling in the back of my mind that something else could be amiss here. What that is, if anything, I’ll leave for you to decide. But I have my theories.

For now, all we can do is take the company line and follow that.

Future Direction

We then finally got to hear the plan for the next 3-6 months for SIRC. Apparently, cash flow and funding were the issues, no surprise. However, Dave confirmed that the company now has 35m in financing secured which should be used to help fund commercial projects and potentially acquisitions.

I’ll stop right there to drop in my take. The funding problems that SIRC has appear to be quite worse than what Dave was saying on the call.

We saw in the Q3 2022 10Q how they were taking out basically loan shark level short-term funding just to keep projects moving. We also heard from Brett Rosen that he had to extend to them emergency short-term funding as well as allowing them to suspend interest payments.

So it was bad, and I think it still is pretty bad. Why?

Just to take a step back – recall that as of Q3 2022, for the prior nine months they had about 31m in book net income, but were still cash flow negative by about 5.6m. What this means, especially with Dave saying that they need funding just to get commercial projects moving, is a couple of things.

While they’re following accounting principles, they seem to be recognizing revenue quite aggressively on deals. If I’m reading between the lines, they are recognizing revenue and associated expenses (based on a milestone completion) that they can’t actually deliver on because they don’t have proper funding.

This leads me to believe that they have to pay suppliers well before they’re able to collect anything from customers. Their cash collections vs. revenue recognition are so out of wack right now that it’s stalling the whole business and they’re stuck in a huge rut.

The good news is that, in theory, as long as they can pass this initial hurdle, they will absolutely be cash flow positive in the next 12 months. This means, however, that they need proper funding that isn’t going to completely erode any profits from the projects they need said funding to complete.

The bad news is, well, they need funding to function, and they have had serious problems finding it. They got burned by Arbiter, the balance sheet is/was a big problem because of their preferred share structures, them not being SEC compliant until late in the year, and now the entire c-suite management leaving. If they don’t get it or get enough of it, they’re in deep trouble.

So their real saving grace is that they have a huge pipeline and also a huge work-in-progress receivable that, theoretically, can be filled with just an injection of cash. Evidently that has come, but until I see a quarter of cash flow break-even at a minimum, I won’t believe it.

Future Acquisitions

Dave then started talking about how there’s an acquisition target right now. First off, when I heard that, I think I did an audible “huh?”. We just got done hearing about how they have no cash, how badly they needed financing just to start projects, they’re cost cutting like crazy, they’re getting sued again, and their c-suite all just left.

Nothing about that screamed to me, hey let’s go buy some more companies.

He clarified by saying that it was going to take cash and shares to grow, and he also seems to think acquisitions will be needed to supplement any organic growth. It just feels like the wrong time to me, but hey I’m not in the weeds in the company. I would just be very nervous to see what equity and financing terms the company gets to acquire someone, especially when the share price has been so deflated.

In other news, this potential acquisition apparently has leadership which Dave Massey hinted could be the next people to run the whole company. More to come there I suppose…

Major Projects

I’ll keep this one short, but evidently the previously announced large projects are still in the works and this funding round will help push those along. So a bullish sign and I’d like to see these get completed so the company has a tangible track record of start to finish delivery.

Arbiter Bank

I mentioned it above, but it sounds like SIRC allegedly got conned by that Darin Pastor guy from Arbiter. SIRC loaned arbiter 4.2m to help get their financial institution setup. In return, Arbiter would help them secure significant debt financing. This obviously never happened, and Darin Pastor appears to be “in the wind” with the 4.2m they loaned him.

I will hold off on speculating too much until they commence their lawsuit as they are planning to sue him for around 100m in lost money and the reputational damage.

Lawsuits and Acquisitions

Dave read a prepared statement about the Future Home Power lawsuit. Basically he just said that nothing in the lawsuit will affect their plans. My take, it’s going to be costly in some regard, but not sink the company. Kind of like the Pablo Diaz lawsuit.

He went on to explain how they’ve changed their M&A strategy and are paying more attention to the prior owners of the companies they acquire. This is a pretty fair statement given the amount of litigation involved with them, so let’s hope they learned from it…

Uplist and SPAC

Dave Massey seems to think that a SPAC is the way to go to an uplist rather than a reverse split. I’m a bit ambivalent to this as along as the SPAC terms are reasonable. It could also be a way for SIRC to simultaneously raise more capital. But this is all very speculative, so I don’t want to spend time on it here.

My General Take

If you couldn’t tell, I’m feeling pretty negative on everything going on with SIRC. I won’t repeat myself, but they’ve been making some pretty serious missteps whether it be their acquisition record, Arbiter, finding financing, cost control, management coming and going, I could go on but I won’t.

If I could sum it up, I’d say that I’m not very confident in management and they have to prove to us over the next six months that they’ll actually right the ship. We need to see revenue growth, profitability, and positive cash flow by the end of Q2 or I’m afraid they’ll be in a death spiral.

By death spiral, I mean the never ending circle of: we’re growing, but we need cash to grow, and we can’t be cash flow positive until we get more cash, but we can’t get cash, but we need cash to be cash flow positive… and on and on it goes until the company gets eaten alive by toxic financing.

This is probably one of the worst-case scenarios.

The best case scenarios for our bulls out there is this financing is exactly what they need, they become cash flow positive in Q2, the business becomes self-sufficient and can organically fund acquisitions via cheaper debt.

My final thought? All is not lost yet!

However, I’m probably leaning more towards the worst-case scenario than I ever have before. That being said, I’m still bullish (by a thread) and I’ve been buying more. I still think there’s a play here, but man, management really needs to get their act together and get this thing moving. It just seems like dumb mistake after dumb mistake keeps coming in that you’d never see at a well-run company.

I’ll leave it at that, hopefully I didn’t rustle too many jimmies, and thanks as always for reading!

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THIS ARTICLE IS NOT FINANCIAL ADVICE AND IS INTENDED ONLY FOR EDUCATIONAL PURPOSES. I AM NOT A FINANCIAL ADVISOR. AS OF THE TIME OF WRITING THIS ARTICLE, I HAVE A LONG POSITION IN SIRC.