Tuesday, 5 December 2017

FanLogic Signs Letter of Intent with Multi Award Winning Singaporean Blockchain Company

FanLogic (FLGC) has been a holding of mine for a few weeks now as I looked for blockchain opportunities. It has run quite a bit from around $0.10 to over $0.70, to the point where I have done some selling on strength so readers should keep that in mind. It has announced an LOI with Singaporean Blockchain Company Easter Egg Pte. Ltd. Of note:

"Easter Egg is best described as a peer to peer gift giving platform with plans to unify into diverse categories (Payments, Remittances, Gifting, Loyalty and Rewards) on one platform by having a standard fundamental unit of exchange, a colored coin utilizing "XFER" that can enable all these transactions on a single Blockchain."

This seems like an interesting match. FLGC needed something to ignite its stagnant business where revenue has been drying up and Easter Egg needed some international exposure and a place to access cash on the capital markets to develop its business.

One thing to be aware of is that FLGC has done two major pivots in less than two years. Tank Resources turned into Spriza Media in February 2016 and Spriza Media turned into FanLogic in February 2017. That is quite unusual to see two business changes so close together, though the second transaction appears to be more of a business combination than a change of business:

"Spriza offers a proven customer acquisition platform utilizing contests, competitions and lotteries. With the integration of Fanlogic's social gaming software, Spriza now offers its brands and agencies an even more immersive and interactive platform.

The platform is coupled with the Spriza subscriber network of millions of users which provides brands and agencies access to an active audience that consumes brand driven promotions and incentives in a single sign on environment.

The merger of Fanlogic's gamification software and expertise will enhance Spriza's incentive platform, providing agencies and brands a deeper offering; increasing Spriza's market relevance in social gaming for advertising and licensed revenue opportunities.
"

FLGC closed a 5 million share private placement at 5 cents a month ago for $250,000 and a second one for 1,816,666 Common Shares at $0.30 per Unit for total gross proceeds of $545,000 yesterday. These placements are substantially in the money already, but that has been the market for these hot blockchain stocks. Whoever these strategic investors are, they are making a ton of money in a very short time span (unfortunately not me), and investors should keep that in mind once the 4 month hold period expires in Q1 2018.

FLGC sits at a $40 million market (non-diluted, plus some warrants which will now be deep in the money so expect some dilution and more cash) and now has some cash in the till to help Easter Egg execute on its business plan. Unlike purely speculative blockchain companies which have technology but no business developments yet, Easter Egg already has an app out called Easter Egg Gifting which can be accessed on the Google Play store. It has 1,000-5,000 installs, so not a lot yet. But it has generated 98 reviews with a very high 4.8 rating with 91 of the 98 reviews being 5-stars. So this company has a history of developing a highly engaging app. Let's see this if this LOI can be finalized and if FLGC can leverage its assets acquired in the Spriza Media transaction to help accelerate Easter Egg's global growth.

Saturday, 2 December 2017

Fintech Select: The Balance Sheet Issue Can Be Solved Through Warrant Exercise

A common short attack on Fintech Select (FTEC) is that its balance sheet looks terrible. This is true and I laid that out as a risk in a previous article of mine. FTEC has been upfront about this and has been making steps in fixing this issue every quarter. After its Q3 filings, the company made note that its working capital deficit has been reduced by $6 million in the last 12 months. From Q2 to Q3 we can see continued improvement. The latest balance sheet shows:



  • Shareholder's deficit of $5.6 million, a $0.5 million improvement from Q2's deficit of $6.1 million.
  • Current assets of $1.5 million less liabilities of $7.6 million for a working capital deficit of $6.1 million. This is also a $0.5 million improvement over Q2 which had $1.7 million in current assets against $8.3 million in liabilities for a deficit of $6.6 million. 
  • Net loss for Q3 was $110,000 on $900,000 in revenue and the company has been toggling back and forth between profit and losses each quarter (profitable quarters are usually due to gain on settlements of debt). The loss from operations is a little over $100,000 per quarter on average, so it's not like FTEC is paddling upstream against a very strong current when trying to eliminate this working capital deficit. The company has marginally cash flow negative operations that could turn positive in the months after the cryptocurrency point-of-sales business goes live. 
 Even with this improvement, there is still a long way to go. However, looking at the warrants and options outstanding, FTEC has the ability to pay off the debts from the proceeds of exercise. Review the chart that I have compiled, based on information available in the Q3 financial statements on SEDAR:

Share count as of September 30, 2017 was 60.6 million.  FTEC has 24.4 million warrants and options outstanding for a total fully diluted share count of 85 million. What's great about this is that this is still a reasonable share float given what the company is doing. Glance Technologies (GET.C) has had no problems flying from pennies to over $3.00 on a share count of well over 100 million.

All the warrants and options are well in-the-money right now which means the $5.9 million proceeds from exercise will eventually happen, as long as FTEC continues to execute on its business plan which has caused it to spike over $0.50 in the first place. If we apply that $5.9 million in cash generated from exercise to the working capital deficit, it just about gets eliminated with a $200,000 deficit remaining. Review the income statement:

FTEC has been recording gains on settlement of debt or forgiveness of interest as part of its goal to improve the balance sheet. This could very well continue which would accelerate the reduction of debt, cover off the $200,000 shortfall after full exercise and cover any marginal operating cash outflow the company may still have going forward. 

The next issue of course is timing. These derivatives have up to three years before expiry so it could be a while before cash comes in. The options are in the hands of management who can control when they exercise and the $0.20 strike warrants have a provision where they can be called in within a month after FTEC stays at $0.50 or above for 10 consecutive trading days. So close to $4 million could come in within, say, the next couple of months. That would be a huge chunk, enough to pay off the statement of claim made against the company by Home Trust and eliminate that negative overhang on the company.

The current share count is 62.1 million, a 1.5 million increase from 60.6 million at the end of September. That means 1.5 million have been exercised during that time period. So expect continued balance sheet improvements going forward at the expense of reasonable dilution.





Thursday, 30 November 2017

Lightning Ventures: Management Confidence Amid Terrible Financials Foretells Good News To Come

Last night Lightning Ventures (LVI.C), among many other companies I follow, released financial results. It was the company's Q2 ended September 30. On September 14, LVI said that it expects to be cash flow positive for the balance of 2017 with significant revenue growth for 2018. Here is a snapshot of the balance sheet and income statement.



Nothing in last night's financials indicates a cash flow positive company. Revenue was only $38,000 with a loss of $670,000 but $248,000 of that was stock compensation which does not impact cash flow. The balance sheet looks in lousy shape as well. $2.5 million in liabilities against only $90,000 in current assets. The bulk of LVI's value sits in the long term assets under goodwill (the technology). This is what the company has to say about its balance sheet situation in the MD&A:

For a company that looks on the brink of needing capital infusion, it certainly has confidence of not needing any more capital:

"The Company has not pledged any of its assets as security for loans, or otherwise is not subject to any debt covenants. Based on current information, the Company anticipates that its working capital is sufficient to meet its expected ongoing obligations for the coming year."

The first sentence of the statement is important. Despite the note payable of $882,000, there is no lien on the company's assets. The second sentence is telling given all the information we have on the current state of affairs with the company. Despite having liquid assets that are a small fraction of Q2's burn rate, LVI thinks that its negative working capital position is fine for the coming year.

There can be only one reason that management thinks this way. The recent business announced, namely the tank cleaning services at Blue Marble:


Must be enough to cover off the current burn rate. Or there are substantially more contracts to come. The business with Blue Marble was announced and at least partially performed in November, several weeks after the close of Q2 statements with that paltry cash balance. So the company is able to perform its duties despite the working capital position. Perhaps it is taking on more debt or has a favourable agreement with Blue Marble where payment is upfront for the services.

I am very happy with my position in LVI. Either management is completely incompetent to think that it can operate with a -$2.5 million working capital deficiency over the next year or it knows a lot more than we do about its imminent revenue and cash flow prospects.

Q3 financials are due at the start of March. Luckily LVI's year end isn't December 31 so we don't have to wait until the end of April to see the next set of financials. The company's claim of being cash flow positive was in September and that next report will cover October to December so there should be no ambiguity the next time around.

Wednesday, 22 November 2017

Update: The Top 10 Events I Am Waiting For In 2017

It has been a couple of weeks since I mentioned the top 10 things I am looking forward to in the remaining part of 2017. I figured now would be a good time for an update since several of those events have occurred with some positive results.

1. Fintech Select (FTEC) launch of the cryptocurrency point-of-sales

FTEC has been having steady news flow over the last couple of weeks, reflecting the imminent and serious nature of the cryptocurrency point-of-sales business. It looks like somebody was shorting FTEC during this volatility. There was an article that highlighted the company's poor balance sheet. This is something I have brought up before and I mentioned as a risk. But there's another way to look at that. Despite the bad balance sheet, look at how far the company has come in developing this business over the last few weeks. Management is obviously working very smart to accomplish the things they have accomplished so far with minimal resources. I'd like to remind people that Mohammad Abuleil took over as CEO in 2015. So he inherited that mess of a balance sheet and has been working to improve it. He is not a good interviewer, but appears to be a doer which is ultimately what we want and need from our CEO as shareholders. It looks like that shorter left with their tail in between their legs; today's spike to 48 cents had the hallmark of a short squeeze.

I think we could get news of the soft launch any day now. That being said, I continue to take advantage of the volatility, selling into strength and buying into weakness. Even after selling a part of my position, FTEC is still my largest holding in terms of dollar value thanks to this recent run and I think it could go up further. But at this point in time I don't think it's a bad idea to take SOME off the table if you are already up over 100% like I am.

For those who are not in FTEC but might be interested in swing trading the hype or as a spec buy longer term hold, I think that is still a good idea because I think FTEC is going higher. There's a difference between someone owning a stock that has grown to a large portion of their portfolio and wanting to sell SOME shares but still owning a LARGE POSITION and someone who would be buying those same shares off of that person to INITIATE a position. Apparently there's some pea-brained traders in this market who can't wrap their heads around a basic concept like this and have to conclude "oh, he is trying to dump shares to you pump and dump pump and dump". So I thought I'd make this very clear. I am selling only because I own too much. You are buying because you don't own enough. We both stand to benefit from a price increase and are betting against a price decrease.

Just because I am selling some of my shares does not mean it's a sell. But at this point in time it is every person for themselves. I bought in and recommended FTEC when it was cheap and I am deep in the money. How high will it go? I have no idea. I am not giving any further recommendations, unless business development goes so well that I think FTEC goes from a hyped up speculative play to one that is undervalued based on fundamentals. I see this stock going one of three ways:

1. There is some kind of issue that delays the soft launch, or some other unforeseen hardship. The stock goes down.

2. The soft launch and full launch go off without a hitch. The stock goes absolutely ballistic in the following few weeks then tapers off as the business isn't as lucrative as first thought. If you look at PEEK I think this would be a great example of that effect. In the days leading up to the Halloween 2016 launch of Peeks Social, The stock raced from the 20's to 60 cents. In the three weeks after that it went as high as $2.39. It has sunk back down to 40 cents since then.

3. The soft launch and full launch go off without a hitch and FTEC starts making big money. This is the scenario where the sky is basically the limit on the stock. Lottery ticket type of returns. After taking profits to the point where you cannot lose on the stock, you might consider leaving a little on the table for this scenario.

I am enjoying the ride for now. But I'm not going to answer any questions about price targets or my selling strategy beyond what I've already done here. Sell a little into strength at every new high and buy back into weakness on any pullback. Along with prudent portfolio management when the stock becomes a very high percentage of my overall wealth, more than I am comfortable with.

2. Peak Positioning Technologies (PKK) debenture financing closed

PKK expects the debenture financing to help fund the minimum $20 million in capital required to set up ASFC to close by December 15. ASFC should be fully operational fairly soon after that. I really look forward to this debenture closing because I think that is the final step for PKK to move off this frustrating 5 cent stock price, despite the company making huge strides in setting up profitable lending and fintech businesses in China this year. Although the debenture closes in a month from now, I think that once the company makes it clear that the debenture is filled and some people were unsuccessful in getting a piece of the action, the stock will quickly move up as demand for the shares suddenly increases. The 5 cent warrants associated with the debenture would no longer be available to the market.

I am in complete hold mode on PKK until I see evidence that the 5 cent level is broken for good and I'd be willing to pay slightly more for shares to add to my position. But anyone looking to initiate a position should look into doing it sooner rather than later since the clock is ticking on the debenture.

3. Global Cannabis Applications (APP) release of Citizen Green

APP has been my diamond jewel in the couple of weeks since I wrote this piece, doubling in price in that time. Basically everything I said about FTEC applies here as well. The stock is up on hype, but there are a lot of near term catalysts that could cause that hype to run on much longer. The CEO made some very aggressive near-term projections on revenue and user base growth. So it could have huge upside on execution or downside on failure. APP has grown to a large portion of my portfolio so I sold some, but the majority of my position remains intact. I will continue to sell into strength and buy back on weakness.

Anyone who is looking for a potential high-flier that will be very volatile on hype with near-term catalysts, APP is an ideal candidate. APP has a fully diluted share structure of 68.5 million shares. That is a $22 million market cap fully diluted. FTEC has 87 million fully diluted shares, a $36 million fully diluted market cap. Both of these companies compare favourably to their blockchain-fad peers which have market caps well in excess of $100 million. Both APP and FTEC offer short term catalysts that drive revenue-generating businesses.

Another stock to consider in all this is ThreeD Capital (IDK). It bought into the recent APP private placement and owns 5 million APP shares (including convertible securities). If APP continues to run hard, IDK could follow suit as the value of this investment increases.

4. First Global Data (FGD) financials

FGD's Q3 financials, along with the rest of the financial releases mentioned on this list are due to come out by November 29. I'm most interested to see FGD's release. With profits in four of the last six quarters, it's the most advanced of the microcap companies I am invested in.

Q2 was a bit of a disappointment with single-digit growth over Q1 and a net loss. That being said, it was still a record quarter in terms of revenue for the company. I would like to see growth over Q2 well into the double digits. Profits will be nice, but if the company had to aggressively hire to fulfill many of the deals it has signed in 2017, I will be okay with that.

5. PKK financials

Revenue was $4,000 for Q3, aligned with my expectations that revenue would be small for the ASDS business that initiated in September. No orders were processed on Gold River and I think it's safe to say none will be processed until ASFC is live. While this revenue number seems paltry, keep in mind that this is just the first month of a recurring revenue business model. I look forward to a hockey stick type of revenue growth with profits once ASFC is up and running.

6. Lightning Ventures (LVI) financials

LVI claimed it was cash flow positive going forward in September. The real interesting set of financials will be Q4, but September does cover one month of Q3 so I think there will be something to look forward to here. LVI has been the beneficiary of much of my sells that took place on FTEC and APP. I bought up as many shares that I could under 4 cents and now that it is 4 cents I will spread any future profits from those two winners to other stocks. I am quite happy with my larger LVI position. I have a gut feeling something good will happen here and at 4 cents or less it is a good gamble.

7. FTEC financials

A week left until financials must be released. FTEC has pulled profits recently, but that has come in the form of gains on debt re-settlement. I would like to see continued re-settlement of debt that will further improve the balance sheet. I am not that excited to see the income statement just yet since none of the new proposed offerings have launched as of the end of Q3. But it would be nice to see some traction on the existing business.

8. FGD 40 U.S State licenses by the end of the year

FGD estimated to have 40 state money services licenses by the end of the year. The goal is to have the final 10 states in Q1. Hopefully California is one of the licenses that will get done in 2017 so FGD and LianLian Pay can fully launch and promote the WeChat remittance service across the U.S. The vast majority of Chinese citizens or people of Chinese decent reside in California or New York so the deal is getting minimal reach right now with the existing state licenses. 

9. Mission Ready Services (MRS) purchase order

As I admitted in my previous piece, I had to nuke my MRS position to load up on the blockchain name-drop fad, namely APP. This has turned out to be the correct move and now I have an interesting decision on my hands.

The news of a purchase order around MRS' $400 million multi-year supply agreement could be the biggest news maker of them all. But there comes a point in time when we're nearing the 11th hour. We're in the last week of November and we know that the last two weeks of December are basically write-offs. We are nearing a situation where the market might panic that this order won't come in Q4. I don't mean to make other people nervous, I am just coming from my perspective which is I have never spoken to the company and I don't think at this point management could say anything to reassure me that wouldn't be insider information anyways.

Now the decision point is, do I want to buy shares now, wait for a panic to buy on a dip or risk not having a position and waking up one day to see MRS up 300% by 9:45AM? Or breath a sign of relief after watching the stock tank on news of issues/delays with the deal. It's the same decision everyone else has to make.

10. Peeks (PEEK) proposed merger with Personas

People have private messaged me, confused that after the announced deal and 73 cent per share valuation that the stock had a very short-lived bounce and is back down. I was not surprised. To use one too many cliches, the stock is damaged goods right now and the market is in "show me the money" mode. PEEK isn't going to move until it demonstrates a marked step towards improved financials - much higher revenue growth, lower burn rate or profits, and strong growth in users.

At first this looks like I have a double standard. I'm willing to forgive PKK and not sell out of that stock despite the very obvious miss of the $500 million revenue and $25 million EBITDA projection that was set for this year. The difference is PKK didn't execute on that promise for (what I think is) a valid reason. The more lucrative opportunity around ASFC came up which should substantially increase profits once it goes live which will be very soon. Peeks has no excuse for not executing on some of the promises made at this time last year, except that Mark underestimated the difficulty and time needed to complete the tasks ahead of him. But with this may come an opportunity as well.

I think the stock is cheap and I now have enough spare cash to take a position once again. I plan to have a nominal position in time for the vote on the transaction just to get a seat at the meeting. Anything beyond that I'll have to take a wait and see approach. I would vote for the deal. It could always be better for shareholders like any deal could be, but it's not so off-base that it's worth voting against it and causing more headaches. Shareholders would be shooting themselves in the feet by voting no. Might as well agree to it so the company can move onto greener pastures ASAP.

Monday, 13 November 2017

The Top 10 Events I Am Waiting For In 2017

2017 has about a month and a half left in it, but there is still so much to look forward to by the end of the year for several stocks that I am watching closely. Here is a top ten list of what I am looking forward to:

1. Fintech Select (FTEC) launch of the cryptocurrency point-of-sales

FTEC has been making very good progress over the last couple of weeks in getting ready for the soft launch of its Selectcoin point-of-sales network, enabling people to buy and sell bitcoin and other cryptocurrency at thousands of locations across Canada. I expect the soft launch of a few sample locations to be announced at any moment. After a couple of weeks of a successful trial run, I expect the full launch to go live, creating a national news event and a high-margin ATM business almost overnight.

I have been selling into rallies and buying back on pullbacks, but FTEC has grown to become my largest holding. Dollars and cents wise, I think other names on this list have bigger deals signed or coming, but nothing impacts local Canadian investors and regular people like this business will. I expect the hype to be massive as it will be a noteworthy news event on a very trendy topic right now - bitcoin and blockchain - which will resonate with people, be exciting, and be very easy to explain to the masses who might not just be interested in transacting and investing in bitcoin, but also with the company that is making accessible to million of Canadians.

Only time will tell how the company deals with this opportunity over the following months and years. But I believe very strongly that early investors will make out like bandits (some already have with the recent move up) and it's up to them if they want to hold some FTEC for the long term. At this point in time I am riding the hype and will evaluate a long-term hold at the appropriate time when I can see a path to financials that justify it.

2. Peak Positioning Technologies (PKK) debenture financing closed

PKK expects the debenture financing to help fund the minimum $20 million in capital required to set up ASFC to close by December 15. ASFC should be fully operational fairly soon after that. I really look forward to this debenture closing because I think that is the final step for PKK to move off this frustrating 5 cent stock price, despite the company making huge strides in setting up profitable lending and fintech businesses in China this year. Although the debenture closes in a month from now, the deadline to request participation is coming up. Once the company makes it clear that the debenture is filled and some people were unsuccessful in getting a piece of the action, I think the stock will quickly move up as demand for the shares suddenly increase because the 5 cent warrants associated with the debenture are no longer available to the market.

3. Global Cannabis Applications (APP) release of Citizen Green

I have been watching how hot blockchain and cannabis stocks have been. APP has been my diamond in the rough that I have been slowly accumulating at cheap prices and it finally got some love today. It closed at 16.5 cents, the highest I have seen since I have owned it.

APP has proposed the release of the Citizen Green platform in Q4. From what I gather, portions of the platform will be released at different times and countries. The basic premise of Citizen Green is to organize and facilitate anecdotal data based on the experiences and feedback of individuals using various strains medicinal marijuana for different ailments. APP's apps will collect that data and put it into blockchain for a data bank of user reviews. It looks like artificial intelligence will be used to try to turn these anecdotes and reviews into actionable medical data for regulators. The company will also leverage the blockchain to present its own token loyalty program.

These initiatives sound like superb hype fodder for the blockchain and cannabis chasers out there and I am guessing based on the tone of the company's recent magazine interview that the rollout will be continuous, leading to a steady news flow. Like FTEC, only time will tell how financially lucrative this will all be, but early investors should make out like bandits on hype here too. The share float is the smallest of any company on this list, and therefore most susceptible to big market moves.

4. First Global Data (FGD) financials

FGD's Q3 financials, along with the rest of the financial releases mentioned on this list are due to come out by November 29. I'm most interested to see FGD's release. With profits in four of the last six quarters, it's the most advanced of the microcap companies I am invested in.

Q2 was a bit of a disappointment with single-digit growth over Q1 and a net loss. That being said, it was still a record quarter in terms of revenue for the company. I would like to see growth over Q2 well into the double digits. Profits will be nice, but if the company had to aggressively hire to fulfill many of the deals it has signed in 2017, I will be okay with that.

5. PKK financials

With ASDS up and running, I am excited to see gross margins and revenues in the very early stages of this profitable fintech business.

6. Lightning Ventures (LVI) financials

LVI claimed it was cash flow positive going forward in September. The real interesting set of financials will be Q4, but September does cover one month of Q3 so I think there will be something to look forward to here.

7. FTEC financials

FTEC has pulled profits recently, but that has come in the form of gains on debt re-settlement. I would like to see continued re-settlement of debt that will further improve the balance sheet. I am not that excited to see the income statement just yet since none of the new proposed offerings have launched as of the end of Q3. But it would be nice to see some traction on the existing business.

8. FGD 40 U.S State licenses by the end of the year

FGD estimated to have 40 state money services licenses by the end of the year. The goal is to have the final 10 states in Q1. Hopefully California is one of the licenses that will get done in 2017 so FGD and LianLian Pay can fully launch and promote the WeChat remittance service across the U.S. The vast majority of Chinese citizens or people of Chinese decent reside in California or New York so the deal is getting minimal reach right now with the existing state licenses. 

9. Mission Ready Services (MRS) purchase order

The news of a purchase order around MRS' $400 million multi-year supply agreement could be the biggest news maker of them all. It sits only at #9 on my list because I have been in and out trading the stock. Shamefully, I had to give in and chase the blockchain fad rather than buy and hold a company which I feel strongly will do well and has real numbers to back it up. But out of all the companies I have invested in, I know this one the least (I haven't spoken with management) and feel the least attached to it. So I'm playing the roulette wheel that my blockchain-related stocks will run before this one announces a huge order so I can reload a huge position at a cheap price. But I am watching closely either way.

10. Peeks (PEEK) proposed merger with Personas

This one is ranked lower as well despite a larger news event because I don't own any PEEK shares at the moment. The stock is halted and there is a good chance this halt could be related to the proposed combination with Personas. Once that news is out, I can re-evaluate the situation and if the price, wherever it opens, represents a good buying opportunity.

Thursday, 2 November 2017

If AMD Was Canadian, It Would Be A $20 Stock Right Now


Summary

AMD had a strong Q3, greatly aided by the impact of GPU demand thanks to cryptocurrency mining.
The bearish argument against AMD, led by Morgan Stanley, includes the assumption that demand for the GPUs for crypto mining will fade.
In Canada, the deal flow has been incredible for blockchain and cryptocurrency stocks. Canadians can't get enough of anything to do with this industry right now.
September headlines that include robust hiring in the industry and Fidelity experimenting with mining suggests that this market is nowhere near topping out.
I believe that the assumption that crypto mining will fade is wrong and AMD will beat expectations for this sector of its business.

 
If Advanced Micro Devices, Inc. (AMD) was a Canadian company, it would be a $20 stock right now. And I'm not talking about the win from the exchange rate difference either. There are many articles on Seeking Alpha and elsewhere that dive into AMD's improved financial performance in Q3 and present bullish and bearish arguments over AMD's position in the microprocessor competitive landscape. I encourage readers to read those articles if they want an awareness of the overall business. I wish to talk specifically about cryptocurrency and its impact on GPU revenues in the near future. As a Canadian investor who has seen the absolute craze the blockchain gold rush has had on our stock market, I believe that analysts and even AMD's CEO has it wrong about this space.

AMD tanked on Monday after a downgrade from Morgan Stanley, with the price target being cut from $11 to $8. The analyst stated that he expects "cryptocurrency to gradually fade from here". CEO Lisa Su hasn't helped matters much by stating the following on the Q3 conference call:
In terms of the headwinds, we have the semi-custom seasonality and we're also predicting that there will be some leveling-off of some of the cryptocurrency demand. As we look at it, it continues to be a factor, but we've seen restocking in the channels and stuff like that. So we're being a little bit conservative on the cryptocurrency side of the equation.
In addition to these suggested headwinds, there appears to be a prevailing trend among both bears and bulls that downplay the growth in GPU business due to the cryptocurrency mining craze. It's somehow lower quality revenue, subject to faddish boom and bust periods. To me, a dollar is a dollar is a dollar. As long as the RX family keeps selling, I think AMD is a compelling buy at these levels. Then bears and bulls can argue until their faces turn blue over the fate of the CPU business at higher prices. The demand for the GPUs will be subject to the price of Ethereum, which is in constant heart attack mode every day from now to forevermore.  So from that perspective I get the concern. But my experience as a Canadian investor, there is no way the bust will come any time soon.

Enter Hive Blockchain and the parade of blockchain bandwagon jumpers

Hive Blockchain Technologies Ltd. (TSXV:HIVE) made its trading debut on September 18th through a reverse takeover of a shell listed on the TSX Venture Exchange. HIVE's business plan is setting up data centers and infrastructure to mine Ethereum, partnering with Genesis Mining. As in other words, it's not exactly rocket science or the cure for cancer. On the day of its debut, the stock closed at $0.97. A month and a half later and HIVE has risen to $4.48, over a billion dollars in market cap. In less than two months, HIVE has raised the following (all figures in $CAD):
Perhaps to investors in the United States, a company that has managed to grow to a billion dollar market cap from a shell and raise $76.5 million in less than two months isn't that impressive. But you have to understand us Canadians. When we go in on something, we go ALL IN:
  • The mining craze of the early to mid 2000's.
  • Peak oil shortly after that.
  • Weed stocks since 2014.
Our markets are known for heavy sector focus and the free flow of investment fund cash into those sectors. Blockchain and cryptocurrency looks like the next one as a whole host of bandwagon jumpers are getting in on the action and raising funds. I believe that this is just the tip of the iceberg:
  • Global Blockchain Technologies Corp. (TSXV:BLOC), an investment company intent on getting into the blockchain and digital currency space, has risen from $1.54 to $2.34 in less than a month after its change in focus to blockchain without having done much of anything so far.
  • LeoNovus Inc (TSXV:LTV) has risen from $0.10 to $0.55 since HIVE debuted, having announced a preliminary agreement with a Big 6 Canadian bank for blockchain hardened data storage and security software.
  • Fintech Select (TSXV:FTEC) is in the final stages of releasing thousands of point-of-sale terminals for bitcoin and other cryptocurrencies across Canada. API integration was completed last week. There are currently around 260 in Canada and 1,750 worldwide.  
  • Sheldon Inwentash, former Pinetree Capital (TSX:PNP) executive and the highest paid Wall Street CEO in 2010, has returned with a new capital pool ThreeD Capital Inc. (CSE:IDK) with the intent of getting into blockchain-related businesses. Read my article about this here
These are just a few examples of the blockchain and cryptocurrency businesses that are popping up all over Canada's stock markets. But the chase for quick cash in one the the world's most notorious markets for quick cash chasers isn't the only barometer for the cryptocurrency market. According to this article in September, jobs in the cryptocurrency industry increased by over 100% compared to the previous six months. Fidelity has been looking hard into blockchain assets and has admitted to starting a small mining operation in September. The setting up of futures markets will help miners to reduce the fluctuation of cash flows according to spot prices, making this a more viable business to more people. None of these are indications that crypto mining has peaked or is fading like what the Morgan Stanley analyst suggests.

Perhaps U.S. investors are more cautious or skeptical of new industries like this and that Morgan Stanley analyst or other bears can use that skepticism as a way to trash AMD. I understand the thought process behind the idea that cryptocurrencies are a house of cards ready to collapse at any time. I have written about this risk. But how are cryptocurrencies really that much more of a house of cards than the commodity futures markets or ETFs like SPDR Gold Shares (GLD) where far, far more paper trades than the actual underlying value of the goods backing that paper? Cryptocurrencies are like baseball cards or art. They don't have any inherent value, but they are worth exactly how much someone is willing to pay for them. And you can fetch 6-digits or more on the world's most sought after pieces of art or baseball cards, and it has been that way for years. So who knows how long this can last.

My experience is there is no indication that the cryptocurrency market and crypto mining markets are going to go away any time soon. The Morgan Stanley analyst is wrong about this being a fading revenue driver for AMD and AMD's CEO is wrong for being overly conservative about this industry, giving bears ammunition to say that AMD's strong Q3 performance will be short lived. I have taken advantage of that and managed to buy into a small position into AMD this week.


Tuesday, 31 October 2017

Has Lightning Ventures Bottomed Out?

Yesterday morning was looking ugly for Lightning Ventures (LVI.C), a stock that I have briefly talked about before. It was originally a small position for me but I have been quietly loading up during this price weakness to accumulate a fairly substantial position. It's not to the size of my larger holdings like PKK, FGD and FTEC, where I have all had a chance to speak with management personally, but it's not chump change either. LVI was down to 2.5 cents where I took an opportunity to buy more, but closed at 3.5 cents on heavy buying in the afternoon. This morning I bought some more at 3.5 cents as the asks dwindled and as I write this the stock has large bids building at 3 cents and briefly hit 4 today. So far, so good.

On the September 14 press release "Lightning Industries Establishes New Distributorships in Mexico, Texas and New Mexico", management claimed that it "expects the balance of 2017 to be cash flow positive and anticipates significant revenue growth in 2018 based on an evolving growth trajectory". You would think that would be positive news, along with the news releases since then, but the stock has tanked from 8 cents all the way down to yesterday's low of 2.5 cents before the bounce. Why?

First, there was a private placement and debt settlement at 2 (a portion at 5) cents that began free trading on October 28. In addition to that, on September 19, Domenari Capital, LLC disposed of 27.6 million shares at 0.75 cents. I don't know the entire story behind why the firm did this (keeping in mind LVI's CEO Don Rainwater is a senior partner at Domenari so this is a friendly deal), but this is what LVI said on the matter:

"Due to the large volume of investor enquiries regarding the Domenari Capital stock disposition, as announced on September 21, 2017, the Company would like to inform shareholders that the shares were reallocated to management, board members and a number of strategic investors that will add significant shareholder value over time.  The shares are subject to the original stock restriction agreement between the Company and Domenari Capital with a thirty-six month vesting schedule.  Further, these parties have all agreed to voluntarily have their shares held in safekeeping with counsel.  It should also be noted that this arrangement was initiated earlier in the year during which time the share price of the Company was substantially lower than the current market pricing."

Since then members of the management team have also been buying on the open market, in addition to buying the cheap shares from Domenari. I was given an opportunity to buy some shares from Domenari as well and I took it. Considering that this was the main driver for the stock price to tank below my average cost from the shares purchased on the open market, I'm going to consider this purchase my "get even" transaction. Obviously people who managed to really load up on the Domenari sale are the big winners and those people who did not gain access to this transaction and have been buying only on the open market have been the losers. But I think we will all be winners on this stock in due time.

Even with the recent dilution, the share count is a reasonable 140 million plus 21 million warrants. That leaves a lot of room for share price appreciation should the company make good on its expectation that:
  1. The balance of 2017 will be cash flow positive.
  2. Significant growth in revenue will be achieved in 2018.
Being cash flow positive doesn't necessarily mean the company will be profitable. The biggest contribution to a variance between accounting profits and positive cash flow would be depreciation and amortization. The company has not recorded any significant amount of that to-date, but does have goodwill associated with the acquisition of the Lightning subsidiary on the balance sheet so that policy should change, probably by the audited annual report.

The real excitement surrounding this stock should be the growth prospects in 2018 and beyond. With the caveat the the term "significant" is very ambiguous. LVI averages about 5-6 digit quarterly revenue numbers now. A doubling of that run rate could be considered significant growth but probably won't get the market all that excited. My view of significant should be revenue with a run rate per quarter in the millions. Let's see if that is management's definition as well.

LVI is an oil and gas services provider looking to use its technology to reduce the costs, enhance efficiency and increase the production of oil and gas wells. On July 5, the company announced that it provided its Hot Oil Trailer to PEMEX, Mexico's state-owned petroleum company, for demonstration purposes. The September 14 press release also made note of two new product lines and the establishment of distributorships in Mexico as well as Texas and New Mexico.  The press release on September 28 noted a JV created between the company and COSI Energy Services in order to provide hot oil and storage tank cleaning services throughout Texas and New Mexico.

There is nothing there that explicitly states exactly how LVI will be cash flow positive going forward in 2017 nor does it guarantee any revenue growth. However, if we are to believe these bold statements made by management, we should expect a press release indicating a large contract coming shortly. The suspicious uptick in buying after the stock looked like death yesterday morning has my radar up for such a press release in the near future.

LVI's technology is backed by US Patent #6478089 and US Patent Pending #62485036. Patent #6478089 was granted in 2002. It's unusual to see a 15 year old patent make waves in an industry now, so perhaps the patent pending technology works in conjunction with the patented technology for LVI's oil and gas well service offerings.