Revolution Lighting - Risky 25% Arbitrage Play

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About: Revolution Lighting Technologies, Inc. (RVLT)
by: Phillip Lyon

Summary

Revolution Lighting has badly managed investor expectations by missing their own sales projections the last couple of years which has lead to a significant decrease in their share price.

The company once again missed guidance in Q3 18 but the CEO is offering to take the company private at $2 a share.

I think the CEO's offer is the best alternative for the company and will be accepted. This allows speculators to take advantage of the current discount to the offer price.

Revolution Lighting (RVLT) is a micro-cap lighting company that has seen a steady erosion in share price since 2013. This decline has largely been due to the company egregiously missing its own sales and earnings guidance. The company once again lowered sales guidance when they provided preliminary Q3 18 results on October 17th, 2018. The stock price took a significant hit after preliminary Q3 results were announced but in the same press release the CEO, Robert LaPenta, offered to take the company private at $2 a share. The market is pricing in quite a bit of skepticism of whether this buy-out will happen as the stock price is currently trading at $1.60 and has traded as low as $1.35 after the offer was announced. Buyers at this price could get a 25% gain if the buy-out goes through but if the buy-out doesn’t happen there will assuredly be a lot more downside to the stock price. At this point I think the company’s best option is to take the buy-out from the CEO because it seems things may not get better for this company.

Before, I explain why the buy-out is probably the best choice for the company and CEO I will give some background on the company’s financial results.

At the end of 2016 the company showed quite a bit of improvement from 2015. Revenue increased from $130 million to $172 million and the net loss decreased from $2.4 million to $0.5 million. In their Q4 16 earnings report the company gave guidance for full year 2017 revenue of $195 – $205 million and adjusted EDIBTA of 10% which would have been a good improvement over 2016. They reiterated this guidance in Q1 17 and Q2 17 but downgraded this guidance initially to $180 – $185 million and 8% EDIBTA and then to $165 – $170 million and 5% - 7% EDIBTA. The company blamed the guidance miss on sales that got delayed in their multifamily division (Value Lighting) due to hurricanes in Texas and the southern United States. The company also blamed the revenue miss on delays of projects in their energy savings division (Energy Source).

The company ended up reporting full year 2017 revenue of only $152 million and took a loss of $54 million after a large restructuring charge. The company claimed the delayed projects had not been lost but they gave guidance for full year 2018 revenue of only $165 – $170 million (it seems $30 – $35 million of guidance had disappeared from the initial guidance in 2017). It is an understatement to say the company badly managed investor expectations for 2017 and the company ended up with a terrible year.

In the Q1 18 earnings call the CEO claimed the company had “gotten its act together” after the restructuring in Q4 17 and felt comfortable with a full year 2018 revenue guidance range of $165 – $175 million. The CEO and CFO even made large insider purchases at $3.60 in early 2018. However, history quickly repeated itself and the company missed quarterly revenue guidance in Q2 18 ($36.4 versus $40 - $43) and the company just announced they would miss in Q3 18 ($33 versus $40 - $42) and full year 2018 ($140 – $145 versus $165 - $175). It seems the company has no idea of how solid their sales projections are. The company continues to claim the revenue reduction is not “due to any loss or deterioration of the Company’s business” but something is obviously amiss.

The company announced in an update to their prelim Q3 18 guidance that there is a SEC investigation into revenue recognition practices at the company. The Company said the change would be to reduce revenue by $5.0 million, $6.3 million and $6.3 million in each of 2014, 2015 and 2016, respectively, and increase revenue by $11.6 million and $5.1 million in 2017 and 2018, respectively. This doesn’t seem to be a major accounting issue as revenue is just being shifted.

However, the company also mentioned the reduced revenue guidance for 2018 has reduced the expected collateral under their bank facility. The company said the CEO has been funding the shortfall and will continue to provide “periodic loans as required”. In addition, the Company is trying to get additional funding from its lender. I think it is reasonable to assume the CEO will continue to provide funding as the buy-out is being considered so speculators should not worry that the company will have a funding issue before a decision is made.

The company mentioned they formed a special committee of independent directors for the purpose of evaluating the CEO’s offer and to determine any strategic alternatives. They did not give a timeframe for when a decision will be made though. I think it is reasonable to assume a decision will be made in the next several months.

Due to the funding issue and the weak guidance for the next couple of quarters it seems like the company would be open to the CEO’s offer. The alternatives would be to raise additional money through a dilution, which would most likely be at an even greater discount to the current stock price and add to the death spiral for the company, or to get some other funding. Both items would only buy the company some time and it seems the deferred sales that led to the company’s missed guidance of the past couple of years may not actually materialize. The company’s financial results continue to decline so there doesn’t seem to be a turn-around on the near horizon. It would seem to be in the best interest of the company to accept the CEO’s offer.

The CEO should also be a motivated buyer because he owns 46% of the common stock and would not want to see his investment take a greater loss. There could also potentially be another offer for the company. The CEO would obviously need to be in favor of an outside offer because he owns 46% of the common stock and could hinder the transaction.

In light of the uncertainty about the CEO’s offer the market is currently pricing in a hefty 20% discount from the offer price of $2. The company’s bad results, current SEC investigation, and funding issues surely contribute to the discount but I would expect the stock price to jump up much closer to $2 if the company accepts the offer. If the company doesn’t accept the offer then this would be a sign to quickly sell (barring some other positive development). I think the stock price could easily drop below a dollar if the offer is not accepted because of the stock’s low float and the lack of positive options for the company.

The current 20% discount provides an opportunity for speculating investors. Also, the current market weakness in the overall market may allow investors to pick up shares at an even better price. There is obviously risk that the buy-out will not go through but I think a buy-out is in the best option for the company and the CEO. I think the odds of a buy-out being completed are much greater than the odds of the buy-out being rejected. Please due your own due diligence.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.