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.

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