PKK Nails it in Q2; I Predict Minimum $6 Million in Revenue and Positive Net Income for 2H 2019

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Sometimes it's good to be wrong. For Peak Positioning Technologies (PKKFF) (PKK.C) Q2 results, I was expecting between $1.1 million and $1.2 million revenue and possibly slightly positive EBITDA. Instead revenue came in at $1.9 million with $340,000 EBITDA. Net loss was $296,000, net loss excluding taxes was $140,000. We see a steady improvement in financials for the past five quarters and I expect that to accelerate:

	Q2 2019	Q1 2019	Q4 2018	Q3 2018	Q2 2018
Revenue	$1,901,723	$949,511	$742,038	$709,738	$224,611
Expenses1	$1,561,991	$971,233	$830,438	$953,513	$802,379
EBITDA2	$339,732	($21,722)	($88,400)	($243,775)	($577,768)

There was a 40 million cross trade on PKK on August 29th, representing a $1 million investment, what I like to call a strategic investment. Now for every buyer there is a seller, but people already know who I think the seller is, and the reasons for selling are likely personal and not related to PKK's business. In addition to that, under the subsequent events section of the financials, PKK disclosed a 22.8 million share financing at $0.025 with a one-half warrant at $0.05 to raise $570,000. While more dilution is frustrating, I am fine with this because a. I think the open market buy and the financing are for the same investor(s) and b. I think this is the final time PKK will have to finance, assuming the debentures coming due at the end of the year all get converted. Successful repatriation of earnings in China to Canada will be the final major step in assuring this is the case.

This result pretty much guarantees that PKK's $9 million revenue target set about a year ago for 2019 is met while "slightly EBITDA positive" is smashed. PKK's business is not like a sales business (outside of the sales of credit reports), where one month sales could be high and the next month it could be low. As a lender and a fintech platform for third party lenders, PKK's revenue is going to grow steadily every month, barring an economic catastrophe where defaults go through the roof. This is important because PKK's massive beat likely came from a very big June and June is now the starting point for July and beyond. ASSC accounted for nearly 20% of the company's revenue (likely over $350,000) for the quarter in less than one month of operations, providing further evidence of my assumption.

PKK's revenue was $1.9 million for the quarter and my guess by month would be something like this:

April - $400,000
May - $600,000
June - $900,000

If June was indeed $900,000, that becomes the monthly run rate heading into July. Not only that, not all that business started on June 1. June 25th business, for example, had only five days of operations for the month and will have 31 days for July. Given that and the disclosure that ASSC had less than one full month of operations, July's revenue has to be at least $1 million assuming absolutely no further growth.

If PKK was to stop growing for the rest of the year and simply maintain what it has, that will be $6 million in revenue for the final six months of the year and just slightly under $9 million of revenue for the year. I don't think I need to tell anyone what a ridiculous assumption that is. So unless something very bad happens at a macroeconomic level in China, or Cubeler blows up or something, PKK is going to smash its $9 million revenue estimate.

That takes me to my next point on earnings. PKK had a $140,000 loss excluding taxes and $340,000 positive EBITDA for the quarter. I'm not going to pretend I know Chinese tax law so that could be a wild card as to whether PKK actually gets to positive net income. But excluding taxes, operating income will almost certainly be positive. On $950,000 additional revenue over Q1, EBITDA improved by $360,000. As revenue will be a minimum $3 million for Q3, over a million dollars higher than Q2, it's reasonable to assume a similar EBITDA flow through. EBITDA should be in excess of $700,000 for Q3. And if that is the case, an additional $360,000 in EBITDA should flow pretty closely to the bottom line. Interest on debt/finance costs and depreciation (two of the three lines items differentiating EBITDA from net income with taxes being the third) should be relatively stable amounts from Q2 to Q3. That would leave PKK with over $200,000 in net income before taxes. This is why I believe that the $570,000 financing will be the final private placement of shares that the company undertakes. Additional financing with debt might be the way to go moving forward. 

One final note, I noticed that PKK management is very specifically mentioning the Cubeler Lending Hub in the news release when the company could just as easily refer only to ASDS. I think this is done with purpose. As some may know, Cubeler is its own private company, also held by members of management. In the event of venture capital raise or an eventual IPO, management wants to be sure that Cubeler is mentioned alongside PKK as a big driver for its success. But of course, PKK actually needs to prove that it is a major success first. This benefits PKK shareholders even if they aren't involved in Cubeler because management has an even greater incentive beyond their duties owed to shareholders and owners of PKK stock. Cubeler's chance of success is greatly enhanced if PKK becomes a legitimate large cap stock.