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.

Sunday 29 October 2017

Pinetree Capital Founder Sheldon Inwentash Looks To Re-Emerge With Blockchain Focus

Pinetree Capital (PNP) founder Sheldon Inwentash is back in the spotlight, diving head first into the latest trend in the junior investment world - blockchain. His new capital pool, ThreeD Capital Inc. (IDK.C) has been on a tear lately just like most other blockchain stocks. I have thrown a few pennies at this for fun, but my main concern of his involvement in blockchain is with Fintech Select (FTEC), of which he sits on the Board of Directors. This interview held by Agoracom gets into the basics of Inwentash's plan to re-emerge with blockchain as his focus:

In the interview he says all the right things. Such as ensuring that the capital pool invests only in high quality blockchain assets that have realistic shots of becoming viable businesses. The interviewer was a little wishy-washy for my taste, sucking up to the man who some people don't hold in very high regard thanks to what happened to Pinetree. Agoracom is an IR service so it probably got paid to conduct this interview and act like a cheerleading service for its duration. I don't really get the purpose of this. Agoracom has been doing this for years. You would think that the firm would have learned by now that if you act like a cheerleader instead of an interviewer, the interview looks like a cheesy pump and dump no matter how serious and thoughtful the person being interviewed was when answering the questions. It's like watching Fox News interview Donald Trump.

Unlike these firms, I usually don't get paid for the material I write (the occasional time I do, it will be explicitly stated). Should I be able to meet Sheldon Inwentash at some point in time, my first question will be along the lines of: "So what have you learned from the events of Pinetree and what safeguards will you put in place this time around to make sure something like that doesn't happen again?" This is the kind of question that prospective investors want to hear an answer for in addition to his thoughts on blockchain technologies, particularly if they are familiar with the Pinetree story.

I'm not going to get into the details surrounding the events that led to Inwentash parting ways with Pinetree. All you need to know about Pinetree can be summarized in this 20-year chart:

Inwentash's all in style of investing was a great creator and destroyer of wealth over those two decades. Every smartass on the message boards likes to trash this man for his final few years at Pinetree without recognizing the years of success prior to that. I like to take a balanced approach. In order for the chart to have had that big crash starting with the 2008 stock market collapse, it would have had to have that big rise and value creation we see in the years prior to that.

When one person introduced me to this opportunity, my first instinct was like many others..."why do I want to invest with the guy who destroyed Pinetree?". His excuse went something like this: "Well, you know, it's not Inwentash's fault that the junior resource market turned on him".

I don't buy this line of reasoning. Yes it's not his fault that the market turned on him, but he did get caught up in it as an investor and ended up making the wrong moves. Warren Buffett didn't get caught up in a five-year TSX Venture mining bear market. Sheldon Inwentash did, and did so on leverage. A fund like Sprott, which also took a huge hit during this time, at least has an explicit investment mandate to invest in the resource sector. I don't know if Pinetree had a specific investment mandate to overweight in mining stocks at this time. But given the history of sector rotation and that a substantial amount of Pinetree's portfolio was in tech stocks like Keek and POET Technologies, I would think there was not, at least not to the extent like a fund like Sprott would be. So Pinetree's leveraged blow up is squarely on his shoulders. If he is candid about this and offers lessons learned it will go a lot further in silencing the critics than the Agoracom way of pretending that 2008-2014 never happened.

With all that being said, we cannot discount Inwentash's successes, such as the ones that Agoracom is more than happy to share:

There has to be something said about Inwentash's resilience. He is in his 60's, and has accumulated hundreds of millions, maybe close to a billion, in net worth. He could just as easily have rode off into the sunset after the Pinetree debacle and live out his golden years in peaceful luxury. Instead, he made a conscience choice to start from scratch with a little CSE listing worth $15 million in market cap in IDK, the acronym for "I Don't Know" and decided to immerse himself in a burgeoning new tech industry that will be filled with shysters and sharks looking to capitalize on the next fad. He has put what's left of his reputation on the line on his ability to weed out those shysters and invest into only quality blockchain assets. This looks like the actions of a man on a mission, someone who is motivated by more than just money, of which he has more than enough. I think Inwentash wants to prove to the Canadian small cap investing world that his final years at Pinetree were the outlier to his career, not the defining moment.

As an investor, it's up to oneself to determine if Inwentash is up to the task and how much of a personal stake each of us wants in on that bet. As an early-stage FTEC investor, I think I am in pretty good shape. How successful will Sheldon Inwentash be with blockchain? Only time will tell. But chances are good that he won't immediately crash and burn. He will use his decades of experience and vast Rolodex to surround himself with people who won't completely screw up any blockchain initiative from day one or try to screw him over. That means early-stage investors will set to benefit. As long as Bitcoin doesn't go crashing 90% in value tomorrow (and I think that does have a non-zero chance of happening at some point in the future, but not in 2017 or 2018), this industry should be hot for a while. Creating money from nothing more than computing power through an ICO? That is Wall Street's ultimate wet dream. Creating a secure means of exchange that is at the epitome of a democratic and self-governed process with minimal government ability to control it? That is every anarchist millennial techie's wet dream. There are too many people with power and knowledge who stand to gain from this industry being a success right now. If someone thinks cryptocurrencies are all one big Ponzi scheme, well, at least they would have to admit that the Ponzi needs some time to work its way through the system so the people on top have a chance to win.

Inwentash's big money and investing experience plus smart blockchain advisors plus a hot industry plus a focus on businesses that can be cash flow positive in the near-term is a recipe for massive investor gains. Even if those gains are only on hype. Since I wrote about Hive Blockchain Technologies (HIVE) a little over a month ago, the stock has gone absolutely berserk with a market cap of over $700 million. What I have heard is that there is an effective promotion behind HIVE (I am going only on what I have heard, I have no evidence and don't really care enough to research it for myself) and so many people have fallen in love with this business plan of setting up data centers in Iceland and Sweden (where the costs to run data centers are cheap) to mine cryptocurrency.

I remember someone recently asked me if FTEC is getting into mining, as if the business has some kind of deficiency if it doesn't. What people don't understand is that ANYONE can get into mining if they want. Literally anyone who is willing to put money into developing a data center either by themselves or as part of a consortium can do this. Whether they can run it profitably or not is another issue entirely, which I assume is why HIVE is so hot - because people think it can.

Genesis Mining is HIVE's partner and largest shareholder in this investment. Just look at the first page of Google results for "Genesis Mining", as it has been a leading provider of cloud mining services:

It seems that people who are investing private equity in this industry and know a lot more about it than TSX Venture retail traders aren't that impressed with Genesis Mining. A lot of "5 out of 10" type of reviews where some people are happy and have seen a return on their investment and others think it is a complete scam. This is the kind of critical thinking that HIVE investors and people like Sheldon Inwentash need to do when looking at the blockchain industry. What did I just say about shysters above? Well, some people think Genesis Mining fits the bill. A lot of those reviews go back to 2015 before the concept of HIVE even existed so it's not like this is one big conspiracy to short and distort a hot penny stock. I have no position in HIVE.

Someone recently said something to me which really resonated. During the Yukon gold rush, the people who consistently made big money weren't the prospectors themselves, but the people who provided the auxiliary services to the miners. Fred Trump, Donald Trump's grandfather, grew his fortune from providing "lodging services" to people of the Yukon during this time. This is what I like about FTEC trying to become a facilitator for the masses to trade bitcoin. It's not getting involved in cryptocurrency mining and speculation itself (at least not yet). It is setting up its own network of point-of-sales for regular people to gain access to buy and sell bitcoin and other cryptocurrency at thousands of retail locations across Canada. The company completed the API integration last week and is finalizing the deal with a national cryptocurrency dealer so it sounds like it is close to going live. Once it does go live I think it will be a national news event. Couple that with the hot blockchain industry and Inwentash's involvement at this pivotal time and I think there is a recipe for a massive move on hype.

I have no price target on FTEC. Take a look at my article on Seeking Alpha for more information and an outline of some of the risks. I think FTEC is heading towards profitable but also very volatile times so buy and sell at your own risk. IDK is probably in the same boat. It's up to you if you want to invest in HIVE but keep in mind that the market cap is about 50 times higher for HIVE than it is for FTEC or IDK. My investing style is if I'm going for these very high risk companies, I want the ones with the most explosive upside potential. Is it easier for FTEC and IDK to hit $100 million in market cap or for HIVE to hit $5 billion? I believe the former to be more likely.

Monday 16 October 2017

DGLT and Urban FT: The Ridiculous Saga Continues

Digiliti Money Group (DGLT) looked like is was turning a corner, up to an $0.80 close. I knew there had to be something amiss because the previous two days saw last minute closes in the low $0.50's on very low volume, purposefully cutting the stock price's rise on the day despite most of the volume going through in the $0.70 to $0.75 range. This time around it was pushed up to a day high. Then after hours we got this tweet from Kasey Kaplan:

You can see my comment in response to this development. So what does this mean?

He's likely telling the exact truth, but a truth that would benefit the cause of Urban FT. This wouldn't be the first time DGLT balked at an offer only to come back to the table later. So far about 90% of the information we have gotten about this proposed deal is from Urban FT through various articles and social media circles. Based on that I can only surmise that Urban FT is acting in good faith and putting forth a fair deal and DGLT management, or what's left of it, is acting like a bunch of incompetent rubes. It would be nice to see an 8-K from DGLT management so shareholders can get an official update on the story and hear DGLT's side of it. Until then, Urban FT can play these tweeting games which the firm obviously knows will impact the stock price but Kasey and team can likely get away with it if they are posting factual and timely information. All in the name of providing market transparency when there is none on DGLT's side.

I think the term supportive is particularly important in this instance. I think that this implies that the loan between UFT and DGLT is still active and that there is no imminent danger of the company going bankrupt, despite DGLT management playing with matches while it is teetering on the edge of insolvency. Or that's what we have been led to believe. But with only getting Urban FT's side of the story in the media and without properly audited financials or recent quarterly results, who really knows about DGLT's cash situation.

What will happen tomorrow? Who knows. Gut instinct is that there will be a sell off because this will be seen as bad news and cause a knee-jerk reaction. We don't know if Kaplan's tweet is merely being as diplomatic as possible because Urban FT must know it is under a microscope for price manipulation that may have at least partially led to the T12 halt. Or if he is being completely honest and Urban FT remains in hot pursuit of DGLT.

It could also be Kaplan trying to lobby retail shareholders behind Urban FT. Although there is a lot of anger directed Kaplan and Urban FT, some of it deserved, this is the only side we have been able to rely on for information. In my eyes, and others, these prospective buyers are trying to act in good faith even if they originally goofed up by yapping on Twitter about this buyout offer. It's DGLT management dropping the ball. That's where all anger should be directed except that there is seemingly no one answering DGLT's calls and emails in which to direct anger towards.

So instead of a drop, perhaps there is a rise tomorrow? Someone has been buying up large blocks of shares in the $0.70 to $0.75 region over the last few days. This wouldn't be a retail day trader trying to load up on a grey market stock. Someone is buying to accumulate shares. Possibly for a hostile takeover by Urban FT? Another entity buying up shares for whatever reason? The main reason to buy on the open market other than the obvious that one thinks the stock will go up would be to secure votes in a hostile takeover bid or to try to deny that bid.

I might put up some asks tomorrow at higher prices to see if they get taken out (not my entire holding, just a part of it). I suggest other shareholders do the same. A substantial block of shares up for sale at a reasonable price (say, anywhere between $0.75 to $1.50) could get taken out if my thesis about the big buyer is correct. I think it is wise to start offloading this position given the nonsense surrounding it, but I don't want to sell too much too soon and give a potential bidder cheap shares. Tomorrow should be an interesting day.