A wild, sudden interest in its boring business has Revolution Lighting Technologies (NASDAQ:RVLT) soaring. Shares have more than doubled over the past three months, pushing the stock into the Russell 3000.
Rather impressive for a company that was pretty much left for dead late last year. Then Robert LaPenta, a high-roller known for both his horse sense and business sense, rode in with multi-millions of dollars to toss RVLT's way in exchange for multi-millions of shares of stock in the light bulb company. After his financial entities' first $6 million infusion last September, LaPenta propped up the struggling company again and again over the following months until the influx totaled $21 million.
But TheStreetSweeper believes Mr. LaPenta is beating a dead horse. RVLT just closed at nearly $4, but compared to its peers the stock should trade for about 7 cents to 20 cents per share. Even Mr. LaPenta's entities paid what seems like a fair price of 13 cents to $1.17.
The reasons behind our position include:
- Big cash burn: dilution looks imminent.
- Based on the market cap of $305.7 million as of Friday's close, sales are ridiculously puny.
- Most revenue depends on a recent over-priced acquisition that struggled with declining sales and no profits.
- Questionable ability to generate recurring revenues.
- Insider buying may be just a cheap way to promote the stock.
The company is still traveling through rough terrain, according to investment advisor Jake Dollarhide, CEO of Longbow Asset Management., "I would say the prospects of RVLT are below average," Mr. Dollarhide said.
WHO'S YOUR (SUGAR) DADDY?
The company's prospects were even dimmer before Mr. LaPenta galloped in. Called Nexxus at the time, the company had been struggling in its residential lighting business. Lowe's offered a ray of hope when it began carrying the company's Array LED light bulbs in 1,100 stores.
But customers didn't like the bulbs. So Lowe's essentially walked away and Nexxus' finances further deteriorated.
Mr. LaPenta's entities' investment wiped out $2.5 million in debt, provided some working capital and settled a patent lawsuit with Royal Philips Electronics, which resulted in RVLT having to pay a licensing fee to sell LED bulbs.
Investors obviously liked Mr. LaPenta's involvement and the stock began rising from below $1 to around $4, in an ascent that we think is patently unwarranted and doomed to lead to a spectacular fall.
Under the initial investment agreement in September 2012, the company handed over to Mr. LaPenta's entities their first lot of stock - 600,000 shares of preferred stock convertible to 46 million shares of common stock for 13 cents per share.
In addition, the financial agreement booted out the RVLT board.
Mr. LaPenta became the new chairman and named to the board his son Robert LaPenta Jr. and two buddies, James DePalma and Robert Basil, who were also officers and members of Mr. LaPenta's financing companies.
By Christmas, Mr. LaPenta and his men, acting as the entity, had converted all the preferred stock.
The following month, the chief financial officer and the president/CEO got the boot. Chairman of the board Mr. LaPenta took over the reins as chief executive. Charles Schafer became president and CFO. Mr. LaPenta also relocated headquarters to his office and charged $564,000 for a "severance expense ... relating to the transition of our corporate office to Stamford, Connecticut."
"They have kind of a sugar daddy," commented one analyst. "That means RVLT won't go bankrupt but it doesn't mean that they're going to make money."
INVESTOR PAYS DISCOUNT
Someone besides Mr. LaPenta finally decided to invest in RVLT. The company announced in March "a new unaffiliated investor" made a $5 million investment in the company. That investor was revealed in the 8-K as American Financial Group Inc.
But here's the deal. In exchange for the cash, RVLT issued common stock at $1.17 per share. That's about one-third of the current price, suggesting institutional investors don't want to pay more than a buck and change for a share.
In any event, like a race horse that repeatedly bucks in the starting gate, RVLT is falling into a frustrating pattern that cuts the chances of investors making money. The company keeps issuing shares for operating cash.
We think dilution is imminent.
The company is burning about $5 million in cash per quarter. It has just about $5.9 million in cash. It appears RVLT may run out of cash as early as this month.
The situation looks tight even considering a $5 million order for a more than 1,000-light-bulb retrofit at the Viacom headquarters in New York City, announced in March.
Payment for this order will likely be strung out over months. Along with the royalty payments resulting from the patent lawsuit, RVLT will have other expenses involved in fulfilling the order. Even considering a cost as low as 30 percent, RVLT could add only $3.5 million to its cash. It's burning way more.
Will the company be able to squeak by through the end of September?TheStreetSweeper believes it surely will need to issue more shares to feed its hunger for cash by then.
In reaching that conclusion -- we couldn't consider RVLT execs' explanations because they didn't respond to requests for an interview -- but we did consider this optimistic nugget in a press release issued in January announcing an unnamed customer had placed an order: "Revolution Lighting Technologies expects to receive a second order totaling $5 million immediately thereafter."
Is this a horse biscuit thrown out to investors looking for any scrap of good news? Is it just salesmanship?
If this is the order tied to the Viacom announcement, there's nothing in that recent press release saying a second order is anticipated. That hoped for order may have fallen through. Even if it did materialize, it's obvious the same issues argued above would apply once again. And, unfortunately, RVLT depends on one customer for almost all of its revenue. All considered, it certainly seems unlikely that RVLT could make it until the end of the year without issuing more shares.
Additionally, it looks as if recurring revenues will be few and far between for this company in such dire need of phenomenal sales to justify its current stock price. Once the bulbs are installed, that's it for RVLT. And since the light bulbs last so long, there's virtually no opportunity to go back and install any appreciable number of new ones anytime soon.
Also, it's a problem that any institution willing to finance RVLT at this point apparently would want a considerable discount to the current stock price, just as American Financial received.
Yet SEC filings show RVLT takes an upbeat attitude to the ongoing cash problem:
While the Company expects to generate negative cash flow from operations in 2013 ... the Company believes it has adequate resources to meet its cash requirements in the near future.
Note the wording: "expects to generate negative cash flow from operations in 2013."
SET UP TO ISSUE MORE SHARES
In fact, it looks like the board is set up to eventually issue even more shares. Though the number of authorized shares is set when a company is created, RVLT board members amended the certificate of incorporation in May in order to increase the number of shares they can issue from 120 million to 150 million.
It's right here in RVLT's Securities and Exchange Commission filing that notifies shareholders of actions taken by majority shareholder RVL by written consent instead of in an annual stockholders meeting. Here's what it says:
Pursuant to our Articles of Incorporation, we currently have 120,000,000 shares of common stock authorized and 5,000,000 shares of preferred stock authorized. In connection with our 2013 Annual Meeting of Stockholders, our Board of Directors has recommended that stockholders approve an amendment to our Certificate of Incorporation which would increase the number of shares of common stock authorized for issuance to 150,000,000 shares. To the extent that common shares are available for issuance, subject to compliance with applicable stock exchange listing rules, our board of directors has the ability, without seeking shareholder approval, to issue additional shares of common stock in the future for such consideration as the board of directors may consider sufficient. The issuance of additional common stock in the future will reduce the proportionate ownership and voting power of the common stock held by our existing shareholders.
It is obvious the board is preparing to do something.
INSIDER BUYING PROBABLY MISUNDERSTOOD
"It's difficult sometimes for a company to get on new investors' radar screen when you're a $3.83 stock, when you have no P/E and negative earnings, no dividends, and your latest report shows a $2.9 million operating loss, which was an increased loss from the previous year," Mr. Dollarhide said. "There's not an improvement in gross margins, there's not an improvement in several areas."
Most investors look at insider trading, too, when they're analyzing a stock. What's happening there may have inspired a bit of misplaced confidence.
Since May, director and majority owner Charles DePalma has bought 35,000 shares of RVLT stock priced between $3.48 and $3.74, totaling about $126,050. Director Dennis McCarthy also bought 10,000 shares for $3.42 each, to add to the 60,000 free shares he'd been granted, barely raising his average cost per share to under a buck.
These shares were bought when the price dipped, spurring a little excitement in investors already caught up in the bull market. But Mr. DePalma is part of LaPenta's financing company that acquired the shares in the floundering company at bargain basement prices. So it's easy to send the signal, "buy on the dip," when someone has $200 million worth of paper profit. Mr. DePalma essentially made these recent, comparatively tiny purchases with pocket change.
When insiders start buying millions of shares at $3.50 apiece, we'll take notice. For now, we believe the insider buying is just for show.
SEESMART: EXPENSIVE ACQUISITION FOR NO PROFIT, DECLINING SALES
Unable to make it in the residential consumer lighting business, the company needed something to sell. In short order, the company changed its name to Revolution Lighting Technologies as it changed the focus to commercial lighting.
This was a wise move in some ways, of course. Unfortunately, RVLT got into the commercial end of the business primarily by buying SeeSmart, an unprofitable company with declining sales.
Investors who saw this acquisition in December 2012 as a reason for more optimism undoubtedly failed to look into SeeSmart. If they had, they probably would have run the other way. We believe RVLT made a desperate, unwise leap in buying this company for close to $20 million.
Filings show SeeSmart:
- Operated at a $2 million loss.
- Sales dropped to $5.9 million from $6.2 million for the last nine months of 2012 versus prior year.
- Showed little ability to build intellectual property. R&D expenses for both 2011 and 2010 reached little more than $700,000.
- Conducted worrisome related party transactions, including a deal with a distributor that received consulting services from the CEO's firm. That distributor accounted for $1.5 million in revenue (~16% of total) in 2011. The distributor owed SeeSmart $424,827 in accounts receivable in 2011, indicating some issues there.
- Its financials included this warning:
Although the Company has obtained a financing facility during 2012, it may be required to obtain additional funding in order to execute its long-term business plans; however it does not currently have commitments from any third parties to provide it with working capital. If the Company fails to obtain additional funding when needed, it may not be able to execute its business plans and the business may suffer, which would have a material adverse effect on its financial position, results of operations, and cash flows.
In a bittersweet development, RVLT discovered it had apparently overvalued SeeSmart just in time to save itself a couple of million dollars. Though they remain in negotiations, RVLT execs think they'll probably be able to trim SeeSmart's purchase price from $20 million to $18 million.
Yet they might have to apply some of those savings to another looming SeeSmart issue:
Prior to the merger of the Company with Seesmart, Seesmart also received a letter from Philips claiming patent infringement and threatening litigation if a license agreement was not negotiated. As a subsequently acquired subsidiary of the Company, Seesmart falls under the Company's settlement agreement with Philips. However, Philips and Seesmart must first agree to the scope of infringing products, and Seesmart may be required to make a payment to address historical product sales.
This problem will eat up RVLT's cash, too. But it isn't clear whether the financial hit likely will be in the tens of thousands or the millions.
UNCERTAIN IP, STRONG COMPETITORS
The looming Philips patent infringement claim against RVLT's SeeSmart also points to another ongoing weakness in RVLT.
Though the company has some patents, it must pay royalties in order to sell many of its products. For each affected Array LED light bulb it sells, RVLT already has to pay licensing fees required under the settlement conditions of the Philips patent lawsuit filed before SeeSmart entered the picture.
And March 25, RVLT announced a "breakthrough LED tube lamp." Great news, except the 10-K notes that its subsidiary must pay royalties to Altair Engineering for LED tube products it sells based on Altair's patents.
So if the new tube light bulb is a breakthrough, it's not clear whether RVLT has a patent protecting it.
"And there are unfortunately some competitors who are doing better than they are. Their eggs aren't all in one basket, in LED," Mr. Dollarhide said.
And further comparison of RVLT with the competition reinforces the impression that RVLT has taken the bit in its mouth and is just about to balk.
Compared to the small, yet bigger money-maker Energy Focus Inc.(OTC: EFOI), RVLT earned about one-third that company's revenue ($29.9m EFOI versus $9.6m RVLT) and lost nearly four times more (-$5.27 m EFOI versus -$19.8 m RVLT).
So if RVLT traded at the same ratio as either peer, the stock would sell for about 7 cents to 20 cents per share. Maybe Mr. LaPenta's group was right on the money when it paid
an average of 32 cents.
Mr. LaPenta has succeeded in business and the race track. But TheStreetSweeper thinks he's chosen the wrong horse this time. A good jockey might be able to ride an unsound nag partway around the track but you wouldn't want to bet on it ever making it to the winner's circle.
Disclosure: The owners of TheStreetSweeper hold a short position in RVLT and stand to profit on any future declines in the stock price.
Additional disclosure: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to firstname.lastname@example.org.