When Revolution Technologies (RVLT) published its Q2 results on August 7, 2013, one may have expected it was the beginning of a sustained rally. EBITDA at $1 million was up 150% over the previous sequential quarter. Cash was solid with $5.3 million in the bank and a current ratio over 2. Gross margin swelled from 42% to 49%.
Then, the bottom fell out:
So what's going on? The forward-looking comments couldn't be any more optimistic as well. From the PR:
Robert V. LaPenta, Chairman and Chief Executive Officer of Revolution Lighting Technologies. "We continue to see a steady increase in LED adoption and believe that customers in the commercial, industrial and municipal markets recognize the significant energy and cost reduction benefits of our LED lighting technologies. Our new business pipeline is robust and we expect a continued acceleration in revenue and profitability as the year progresses."
"We have further strengthened our financial position with the growth of our sales pipeline and our strong gross margin, as well as the elimination of charges that have contributed to previous quarterly net losses," said Charles J. Schafer, President and Chief Financial Officer of Revolution Lighting. "We have adequate resources and are continuing to invest in the growth of Revolution Lighting."
Schafer continued: "In addition, Aston Capital's recently announced formation of LightCap I Fund will provide Revolution Lighting customers with an alternative source of capital to purchase and install LED products, a challenge that has historically kept certain customers out of the LED market. We expect this financing option for our customers to contribute positively to Revolution Lighting's financial performance."
With that said, I have been a long time bear of RVLT, which I explain in my two previous articles here and here. My main concern and short thesis has been on RVLT's cash position. That concern has proven so far to be unfounded as RVLT's operating results appear to have improved in a manner that it ended up not needing to raise money. From the PR:
"The Company reported an operating loss of $1.3 million in the second quarter of 2013 as compared to $5.6 million in the same period of 2012. Operating results for the second quarter were negatively impacted by non-operating costs, one-time and non-cash charges of $2.3 million."
This means if you eliminate the "non-operating costs, one-time and non-cash charges," which one should do to evaluate going forward, it had a net income of $1 million. Add to that management's belief of an acceleration of net income and a stock price clipped very hard recently, and I am no longer interested in being short RVLT. In fact, I'm potentially looking to go long.
But I'm not ready to go long just yet. RVLT still boasts a $178 million market cap at the time of this writing. If I annualize a $1 million net income, I get a P/E of over 44. That's not necessarily overvalued if the E in the P/E accelerates as management expects, but there is uncertainty, for me at least, surrounding RVLT's latest acquisition, about which management has been thin on financial details. Is this Relume Technologies profitable? What's its balance sheet look like? What sort of one-time charges are we looking at?
The stock portion of the Relume acquisition was at $4.59 per share. It's tempting to get long RVLT knowing I can buy in at more than a 50% discount versus what Relume shareholders thought RVLT was worth when they sold their company. It also though begs the question: who got the better end of that deal? Perhaps Relume was willing to sell itself for high-priced stock (+ $5 million cash) because it knew RVLT was already grossly overpaying. Who knows? These uncertainties and unanswered questions will keep me out of RVLT for now but watching like a hawk to possibly go long. If the price per share gets cheap enough to maybe $1.00 per share, then I'm in. At $1.00, it would trade around a 20 annualized P/E of last quarter. I might be willing to pay far higher than $1.00 if I get satisfactory answers to the above questions in the form of PRs or SEC filings. Good luck to all investors.