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):

• $16.5 million on September 7 as part of the RTO. This included the acquisition of a data center in Iceland.
• $30 million through a bought deal financing which closed on October 11, at a price of $1.50 per share. The proceeds were used, in part, to acquire a second data center in Iceland. 
• Another $30 million bought deal financing priced at $2.80 was announced on October 25. The proceeds will be used, in part, to fund the second phase of construction at the cryptocurrency mining data center in Sweden.

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.

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.

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.

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.

Hive Blockchain's Hot Debut Gives Hope To Fintech Select Investors

Hive Blockchain Technologies (HIVE) made its debut on the Venture today and is trading at $0.90, up 200% from the price of the financing that took place during the reverse takeover transition from Leeta Gold. I have not purchased this stock today as I have exhausted all cash resources, but it does look interesting.

I recommend reading the registration statement filed on SEDAR:

http://www.sedar.com/GetFile.do?lang=EN&docClass=13&issuerNo=00004998&issuerType=03&projectNo=02675521&docId=4181847

It's 134 pages and I have just skimmed through it quickly, but it appears to provide a detailed risk-reward profile of investing in blockchain and cryptocurrency. I think this is a valuable source for Fintech Select (FTEC), formerly Selectcore (SCG), investors such as myself.

HIVE has 226,584,760 shares outstanding, about 250 million fully diluted. So at $0.90 the fully diluted market cap is $225 million.

FTEC has 60.6 million shares outstanding and another 26.7 million in warrants. The fully diluted market cap at $0.20 is $17.5 million. Clearly there is large upside and investment demand for FTEC based on what I have seen with HIVE today if it can achieve some of the initiatives stated in the AGM several weeks ago. I am taking a wait and see approach for the remainder of 2017 to see what this company can do.

Talks Between Urban FT And Digiliti Continue: My Guess Is A Reverse Takeover

An 8-K filed by Digiliti (DGLT) last week showed that the company came to an official agreement with Urban FT's financing wing UFT Equities for a Secured Promissory Note. People have asked my opinion on it so here it is. Why have I decided to post this on my personal blog instead of Seeking Alpha? Seeking Alpha qualified my first write up on DGLT as an article. That means I get paid for it. My next two write ups didn't qualify for whatever reason and I had to post them as blogs. Seeking Alpha puts ads up on blog posts but doesn't pay out for them so I figure instead of giving the site content and traffic for free I might as well offer readers an ad free experience and expand the reach for my personal blog. Here are some of my recent Canadian small cap picks if interested:

Mission Ready Services Signs $400 Million Deal The Military
Seven Other Stocks I'm Watching Closely for the Rest of 2017

In addition to the 8-K, there was an attachment disclosing the details of the note. It's long and filled with legalese, but the main takeaway that shareholders will want to know from this is:

"If a definitive agreement with respect to the Proposed Merger is not entered into on or prior to September 30, 2017 or such later date as agreed upon by the parties in writing, the obligations of the Noteholder to make future advances pursuant to this Note shall terminate with immediate effect."

As in other words, if there is no deal made by the end of September, DGLT is in major trouble. But the hurt would be much larger for insiders and management who own a heap of shares compared to us retail investors who bought up shares the few days leading up to the halt. Urban FT has also gone on public record practically salivating over DGLT's client base and business (not so much the business model itself which is what has led DGLT down this path to destruction).  So I believe that both sides are working hard to get a deal done. Ideally September 30th would be a hard deadline, but it wouldn't surprise me if talks continued beyond that. Just by looking at Urban FT's news page on its website tells you all you need to know about the company's mindset.

So what do I think will happen? The language in the 8-K has me leaning to a reverse takeover as my best guess. It makes sense as Urban FT has been trying to increase its public profile recently. A reverse merger by definition means that Urban FT interests would come away with the bulk of the shares. My experience has been that reverse takeover deals result between 50% to 90% of the newly created float going to the new owner. That would mean DGLT would have a minimum of 20 million shares and up to 100 million shares outstanding post-merger. However, the float itself would remain unchanged as Urban FT would own all of the newly formed shares and there would presumably be a lock-up period or some kind of disincentive to immediately dumping millions of shares.

Another article about the deal released today has Urban FT CEO Richard Steggall reiterating that the closing price of DGLT's stock of $1.05 represents a "fair market value". So a reverse takeover would likely value Urban FT around $1.05 for hypothetical "UFT" stock. There isn't a lot of information surrounding Urban FT available, but the company did complete a $3 million seed round at an undisclosed valuation in 2012 as well as two follow up rounds of undisclosed amounts.

Urban FT acquired Wipit in 2015 and iParse in 2017. Wipit is a mobile payments solution provider for the underbanked. It has an active partnership with Sprint (see website, as well read the fine print at the bottom of the page referencing Urban FT as the operator of this program) and has signed a deal with H&R Block back in 2012, but I haven't seen anything that suggests it's particularly active or lucrative. The iParse acquisition seems to have been mostly for its technology, allowing Urban FT to white label its mobile banking solution to all banks and credit unions, regardless of size. The article I am referencing from mid-July made note that the plug-in made possible by the iParse acquisition would be deployed in 60 days - or right around now as the DGLT deal looks to get done.

Richard Steggall and Urban FT's President Kasey Kaplan are the two faces of the company. They disseminate and promote Urban FT's activity in the FinTech space as well as opine on various trends in the industry. Both have active social media profiles. They have made missteps yapping about the DGLT offer too early and often which greatly impacted the stock price before it was halted on 8/16, but seem to have learned their lessons from the mistake and have acted more responsibly since then. Both of these men would make pretty good stewards for a publicly traded company, able to disclose Urban FT's business in a functional but not overly promotional way. This would serve well in, for instance, analyst conference calls.

What I am trying to get to is that on the surface, Urban FT looks to be at an ideal time to go public. It has enough interesting deals going on like the one with Sprint and this new iParse offering in addition to whatever synergies it may pick up from merging with DGLT. The management team appears capable. The FinTech space is hot. So no matter what valuation this proposed reverse takeover may entail, the stock has a significant chance of going higher as the market may love this deal. 

Short interest as of 8/31 was 845,643 which is actually less than what I originally guessed, but is still a high enough amount on a stock with 10 million shares outstanding and is currently halted pending some kind of deal. This is ripe for a short squeeze if/when it opens.

While my patience has been wearing thin, what I can say as a long is that I am much more confident about my position once it opens than what those 800,000+ shares short should be. Today's article mentioned the following about the possible timing of DGLT re-opening for trading:

"Once DGLT appoints new auditors and they complete an audit review of 2016 and 2017 earnings to date, Steggall anticipates that the stock will resume trading. He expects a new firm will be appointed later this week."

So perhaps if the new firm is hired by the end of this week and is immediately deployed to review the books, could we see the halt lifted as well as news of the M&A deal by the end of this month?

Mission Ready Services: Bought Shares On $400 Million Deal With U.S. Military

Mission Ready Services (MRS) announced a distribution agreement to supply its products to a foreign military, with all signs pointing to that foreign military being the United States.

The Material Terms of the Agreement include:

• Minimum Purchases (USD): Year 1 (2018), $50MM; Year 2 (2019), $50MM; Year 3 (2020), $100MM; Year 4 (2021), $100MM; Year 5 (2022), $100MM.
• Advance Payments: Distributor agrees to pay Mission Ready (the “Manufacturer”) a down payment equal to forty percent (40%) of the purchase order amount within 10-days of submitting the purchase order.
• Exclusivity: Manufacturer appoints Distributor, on an exclusive basis, as its sole distributor for the defined territory.

The total minimum guaranteed amount for this contract is $400 million over the next 5 years. The press release implies that the contract will start in 2018 but the material change report shows that the first $50 million could occur any time between now and the end of 2018. This is the largest deal I have ever seen relative to market cap in the Canadian junior world. While it's portrayed as something much more definite than an LOI, the caveat is that the anonymous distributor (possibly Federal Resources Supply Company, a distributor that MRS signed an agreement with in Q2 2017) isn't subject to a very strict punishment for not adhering to the minimum purchase volumes. Once the purchase order comes and the 40% down payment is sent to MRS, that's when we can be assured of the distributor's dedication to this deal.

With that being said, the risk-to-reward trade off from this deal is way out of whack. At 20 cents, the fully diluted market cap (~127M shares) is $25 million CAD. As soon as the stock opened yesterday at 11:30 I bought 200,000 shares with the intent to ride it for a short period of time since I thought it would take off. Instead the stock pulled back to 16 cents which allowed me to load up, really load up. That includes clearing out my U.S. account (well not DGLT) and using credit card debt. Not something that I wanted to do but when I was given this opportunity I took it. The pullback could be from profit takers as well as a significant amount of warrants at the 15 cent level. I get it. I was lambasted for selling a few hundred thousand of my six million shares/warrants of PKK when it hit 20 cents before buying that all back and then some as it seeped back down. So I won't fault others for taking huge profits. If you own a stock that is 10% of your portfolio and it suddenly triples, it has grown to become 25% of your portfolio. Selling parts of your holdings isn't being a weak hand, it's showing prudent portfolio management. The 30M+ volume on the sell side allowed me to become a participant in the 30M+ of the volume on the buy side relatively easily and at good prices. I thank the sellers.

I'd like to share a relevant link:

https://www.defense.gov/News/Contracts/

This is the U.S. Department of Defense contract announcement page. I have skimmed through the contract announcements over the past couple of days and haven't seen anything that could match the terms of the contract as announced by MRS. It's tricky though, as the contract name could be awarded to the anonymous distributor and it will likely be for more than $400M as that is only the cut to MRS as the role of manufacturer.  The announcement might still be to come. So investors should keep their eyes peeled and also have a look at the contract announcements over the past several days. The search function on the site is completely useless. So several more pairs of eyes might pick up something that I missed. It also means that I won't have to scour the website  - delegation of tasks to other shareholders with a large stake in this stock.

 I'm certainly not suggesting that the contract is bogus. I wouldn't load up if I thought it was, plus with the day long halt the Venture Exchange likely went through this deal quite carefully. The company has undertaken steps to put all its resources into fulfilling this deal, namely reneging on the Wild Things acquisition. But if this contract does show up on the DoD website that would be a huge boost to its credibility and basically assure us that the minimum threshold will be met. After all, if the distributor can sign a deal for $400 million plus markup with the U.S. Government, why wouldn't they fulfill their duty to MRS? That would be throwing away middle-man profits. MRS is the one sacked with the tough job of actually producing the goods.

Speaking of tough jobs, one of the prime causes for the stock not immediately spiking over 50 cents is likely the market's worry that MRS is going to have to finance through equity to garner some cash to fulfill its end of the deal. I don't share this view, particularly by reading this paragraph in the release:

"MediaTech Capital Partner’s Porter Bibb, who recently partnered with Mission Ready (see Company’s news release dated August 2, 2017), states, “Mission Ready’s impressive new management team has delivered on its promise to put Mission Ready on a fast track to rapid growth and significant profitability as a market leader in the burgeoning military and public safety tactical equipment sector.” MediaTech will assist the Company with obtaining bridge loan capital for raw materials, as required, and will help to facilitate the rapid expansion of the Company’s manufacturing and sales divisions."

It explicitly states that MediaTech and MRS will seek to obtain bridge loan financing. It makes sense to go with PO financing rather than equity with the new stage the company is about to enter as a major manufacturer. If equity financing is needed at a large scale (small financing for working capital requirements is acceptable) then the company and its capital partner completely dropped the ball on this one. Military spending is about as safe of an industry as you can be in with the current political climate in the Unites States. Interest rates are still very low in historical terms and the stock market is high. There should be firms lining up to finance this deal, seeking some alpha return on an investment that should result in an 8-12% coupon for a bridge loan.

Valuation

How much is MRS worth right now?  Not the easiest question to answer at this early stage but I think most people will answer "far higher than a $25 million market cap". The company hasn't given any EBITDA guidance on this deal yet so I think the most straightforward method to use is a revenue multiplier. Axon Enterprise, Inc. (AAXN), formerly Taser, is the first company that I can think of that manufacturers equipment for the law enforcement and defense industry. It has a Price/Sales ratio of 3.7x.

If we were to apply that 3.7x revenue multiple to the $50 million in revenue guaranteed by that contract in 2018, that would be a $185 million valuation or about $1.45 per fully diluted share US, which translates to to about $1.80 CAD. Now obviously there are a couple of issues with comparing AAXN's already existing revenue to MRS' supposed future revenue stream:

• AAXN's revenue is multiple is based on past, audited results. The MRS contract is not yet 100% guaranteed.
• AAXN is profitable at its current level of revenue. We don't know the gross margins on the MRS contract nor if this will be enough to get the company to profitability.
• AAXN has an existing manufacturing process that can handle large volumes. MRS has yet to prove that it can do this (though it looks like the company brought in new CEO Jeff Schwartz specifically to tackle this issue).

There are also a couple of advantages:

• We know that the revenue stream on this deal will double by 2021. AAXN will be challenged to double revenue by then.
• This is just one contract and the $50 million is referred to as a minimum commitment. The revenue stream from this contract will be added to the existing marginal revenue stream as well as any other contracts signed in the near future. Revenue could be substantially higher than $50 million in 2018.

Rather than saying that MRS is definitely worth X price, I'll look at it from the perspective of how big of a discount the market is valuing MRS relative to AAXN and where I think it should be. If $1.80 is the price MRS is assuming all goes well with the contract, the manufacturing and the financial audit between now and 18 months from now, $0.20 means that the market is giving an 89% discount. That means it is giving MRS an 11% chance of success (or say, a 22% chance of getting half way there). I personally think that's way too low.

What's a reasonable target price in my opinion? Well, $0.50 is a nice round number that has a realistic shot based on MRS' current breakout and that would imply about a 28% chance of success. I think if everyone looks at it from this perspective, they'll figure out a comfortable level in which to take profits. That doesn't mean I would dump all my shares at exactly 50 cents nor would I recommend anyone else do that.

Offloading small lots from 25 to 75 cents would result in the same 50 cent average sell price and provide an opportunity to trade spikes and dips. You can never accurately predict when to sell or what will happen. Just look at DGLT as an example. Had I not starting selling in lots between $0.75 and $1.00 I'd be stuck with 100% of my money in a stock that has been halted for three weeks, even if I am technically up over 300%. At least in that case I recovered my original investment and then some and whatever ends up happening to that stock is gravy.

Final Note

Not only do I think MRS will move up, I think for the health of the Venture Exchange, it HAS to move up. If we can't make money trading a $25 million CAD market cap stock that has just signed a $400 million US contract to provide protective gear to the U.S. military, what chance do we have to make money on PKK, FGD, PEEK or any other stock not being chased by weed dreamers? This contract is the Holy Grail for junior investors. There are stocks on the NASDAQ with 5 to 10 times the market cap that would double if they announced a $400 million contract with the United States military. MRS should make all of us good money. If it doesn't, this market is completely broken.