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Why Are People So Upset Over The LXV Private Placement?

|Includes:FRWRF, LX Ventures Inc (LXVTF)

There's been much weeping and gnashing of teeth for some current and past shareholders of LX Ventures (OTCQX:LXVTF) as one can only assume the company did a private placement of Biblical proportions yesterday. In reality LXV will be raising $3M for 8.7M shares at 35 cents, or about 10-15% dilution. I'm not ecstatic about it, but not too upset about it either. Of course I'd prefer a raise at 50 cents or 65 cents. In fact, I'd prefer it if Warren Buffett valued Mobio at the same level as Berkshire Hathaway and gave $3M for 30 LXV shares valued at $100K each. But it didn't happen that way. This is the TSX Venture and many companies have done FAR more dilutive activities than that. More on that later. It's late and I'm rushing through this blog post so it's not written to the best of my ability but some things being said really irritate me so I felt I needed to get this out tonight.

I assume at this stage that most people who have invested in LXV have read my blog post "Mobio INsider Could Be The Next Generation Of Twitter". For those people who bothered to read it all the way through, you can see that I felt that the company will need to undergo significant dilution with 250 million shares being my top-end estimate for its float. To me, that's ok as long as the company is adding value. Since the capital raise prior to yesterday's announcement the company has:

  • Closed on the Copper acquisition, which involved paying out more money to acquire it because it hit its revenue targets
  • Closed on the Strutta acquisition
  • Grew Mobio traffic to the point where it ranks around 10K on Alexa

So I ask, what's the big problem? They are adding shares to the float but adding value to the company. People are concerned about how quickly LXV is burning through cash but look at the assets just purchased. My previous blog post goes into some detail on how much Copper was paid for and then compares it to Brightcove's payment for Zencoder. All indications are that LXV did pretty well in that deal.

Anyone who cries about the company's private placement at 35 cents is not too familiar with the culture on the TSX Venture. Case in point, my current largest holding Fireswirl Technologies (OTC:FRWRF) did two small private placements of less than 10% dilution at heavy discounts to market prices. On August 22, they priced the first one at 13 cents per share which was a discount of more than half of the closing price of 30 cents although much less of a discount to the 17 cents is was priced a couple of weeks prior. The stock price tanked 40% the next day to 18 cents but then was back to the mid-20's a month later.

On December 18, FSW announced a second PP at 20 cents a share, a 38% discount to the closing price of 32 cents. The stock tanked to 25 cents the next day but as of today's close sits at 33 cents. The "cheap paper" has not impacted the long term price of the company as it is seen as using the cash to grow the company's revenues and add shareholder value. Buying into the stock the next day following the placements would have netted you two strong performing trades over a short period of time. Neither instance of FSW's capital raise caused a ceiling on the stock price. More like the opposite - a floor. A capital raise can be seen as good or bad news. In the case of LXV and FSW, both were seen as bad. But once that's out and the money is in the bank, you know they will be using that money to create good news, and that good news will be announced before more possible bad news.

The moral of the story is, you don't sell a stock for a loss then whine about the capital raise right after it's been done. If you really hate it that much you keep your big mouth shut and you quietly offload your holdings the next time the stock experiences a spike in price. And there will be a spike on LXV. The company is well set up for it. I expect a doubling or tripling in price will occur in the next few weeks (possibly in one day depending on significant news) and the crying of the private placement will be a distant memory. That's the right time to sell if you want. For anyone who thinks I'm going to be one of those sellers completely exiting my position, I refer you to the point above where I stated that FSW is my largest holding as I've held it through two supposedly underpriced private placements.

Disclosure: I am long LXVTF, FRWRF.