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Edward Vranic, CFA
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I am a private investor based out of Toronto, Canada and I have been investing since 2003. After 8 years in Corporate Finance with a Canadian Telecom company I have decided to dedicate myself full-time to the capital markets. I write on Seeking Alpha to demonstrate my financial analysis and... More
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  • Update On LX Ventures 0 comments
    Feb 23, 2014 5:22 PM | about stocks: LXVTF, BCOV

    I recently got an interesting email from someone who is concerned over the dilution of LX Ventures:

    I promised an answer to this question in the form of a blog post. This won't be as in-depth as my previous posts have been. The three prime sources for concern were:

    1. LX Ventures is using shares to purchase other assets outside of Mobio.

    2. Insiders are giving themselves stock options and "lining their pockets".

    3. There is a risk that LXV will have significant dilution until it is cash flow positive or Mobio gets bought out. So even if Mobio is sold for a high dollar figure, the per share result will not be that high.

    1. I think that it is smart of them to acquire Strutta and Copper Cloud the way that they did. Reviewing the terms of the Copper purchase, the company secured a $1.5M loan to fund part of the cash requirements instead of offering more shares so they did use leveraging to some effect. However, I disagree with using too much leveraging at this early stage. How many start up companies are in deep trouble now because they used too much debt too early? Let's see LXV earn significant revenues and head towards profitability before using too much debt to fund any purchases.

    The terms of the purchase are as follows:

    "Under the terms of the acquisition, LXV has acquired all of the issued and outstanding share capital of Copper. Payment at closing included the initial payment of 2,183,333 common shares and $500,000 in cash. Based on the accelerated revenue growth achieved by Copper since the letter of intent was signed in November, Copper has also met certain agreed financial performance milestones, resulting in an additional 2,777,776 common shares and $1,000,000 in cash being paid at closing. A final payment of 694,444 common shares and $500,000 is due upon Copper achieving a final revenue growth milestone, with the vendors having the election to receive up to $500,000 in cash, in lieu of the final share installment. The common shares issued are subject to various escrow and pooling restrictions over a 24 month period."

    So LXV experienced more dilution but only thanks to Copper achieving financial performance milestones so in the long run this is a good thing. Thus far 5M shares and $1.5M in cash has been used to purchase Copper. An additional $1M compensation is coming in the form of cash or half cash and half shares if the share price is in excess of 72 cents. At a 40 cent share stock price, Copper has been purchased for $4.5M if all financial targets get hit.

    Brightcove (NASDAQ:BCOV) paid $30M for Zencoder in 2012, a video cloud encoder that is similar to Copper's Panda business, just one of several businesses that Copper is currently engaged in. The business at the time was as follows:

    "Zencoder has more than 1,000 paying customers for its encoding services, including PBS, Scripps Networks Interactive, IGN, SmugMug, Yammer, TwitVid, College Humor, Funny or Die, and others. The open source Video.js player is used on more than 24,000 websites."

    Compare that to Copper's business today:

    "Copper has over 30,000 users and a sustained month over month revenue growth rate of 11%. Copper works with clients including SAP, McCann Worldwide, Glassdoor, AT&T, Salesforce, Peoples Bank and active new user signups are growing at 5% per month."

    It's hard to say for sure which business was more valuable at the time of purchase as the 1,000 paying customers for Zencoder back then could have had much higher revenue per client figures than the 30,000 users for Copper today. But at first glance it looks like LXV paid a very reasonable price for Copper, which will result in an immediate positive impact on the financial statements while Mobio continues to grow.

    2. It's up to each individual to determine if the compensation package management has is reasonable. I don't see anything out of line with what they are doing versus other TSXV companies with the exception being that LXV's stock price is relatively strong so they actually have a chance to exercise their options as they are in-the-money.

    What is a more important indicator in my view is that insiders are emptying those pockets a bit to purchase more shares. The latest insider transaction results reveal that close to 250K shares have been purchased by three members of the leadership team since the start of February. If the goal is to line their pockets, the easiest path to that is an increase in stock price before any further dilution takes place.

    (click to enlarge)

    3. How much dilution the company will need while bringing Mobio either up to financial profitability or sell it is a complete wild card at this stage. In my first blog post about LXV I made a very wide range estimate that the company will have between 100M and 250M shares. The company has released financials ended Oct 2013 which saw spending of $900K for the quarter as it prepared for Mobio INsider to go live. The next financials are due at the end of March which will be ended January 2014 and will contain the revenues and expenses of Mobio being live for 2 months.

    Right now it's anybody's guess as to how high the cash burn will be, but I think it could be anywhere between $3M to $5M for the quarter. If it's $5M per quarter for the rest of the year then the capital raise needed will be in the $20M range depending on how many warrants get exercised. If all $20M were to be raised through a private placement at 40 cents per share, that would lead to a 50M share dilution. If the stock price is higher then the capital raise could occur at higher prices which would result in less dilution. At this stage I think that is reasonable and I maintain my upper estimate of the float being no more than 250M shares.

    I don't think 250M shares will be an issue for shareholders as long as the money is spent adding value to the business. I believe most people would be happy with 250M shares if it resulted in a billion dollar valuation for Mobio with additional significant value in Strutta and Copper. It would result in at least a 1000% gain from the current stock price.

    Disclosure: I am long LXVTF.

    Stocks: LXVTF, BCOV
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