Lighting Science Group has been losing money, but it is repositioning to go to positive margin. And at least one deep-pocketed investor still believes.
There have been a lot of comments recently in this community claiming that LSG is doomed. Imminently. On the other hand, my recent blog named LSG as one of five possible market leaders in LED light bulbs by the end of 2014. So who's right? And what is it going to take for LSG to survive?
I don't have any inside information. But while I have opinions on darn near every company in this field, with LSG it's possible to get some real financial data, because it is publicly traded over-the-counter (LSCG). So looking at some SEC filings tells loads about how and what it's doing. And they're pretty factual, since there's jail time if it isn't the truth.
As an over-the-counter stock, LSG has an average daily volume of only 25,000 shares. That means it isn't really being traded much -- the shares are place-holders for speculation that they might someday be worth something. And of course, it gives LSG a way to give out options to employees.
I next took a look at one of LSG's 8-Ks filed on Dec. 11. From this we learn that Pegasus Capital owns about 82% of LSG common stock. That's in addition to its preferred shares, which the 8-K doesn't record. They also list three raises in the last two years: $6 million in March and May of 2012, $2 million in April 2012, and $20 million in Sep. 2013. The newswire indicates that this last is "senior Series J Convertible Preferred stock." This fundamentally means that all the former stock issuances have been nulled out, and only the people receiving these shares have any real ownership in the company. The interesting part of all this: Significant sums of money are still being put into LSG. Someone with deep pockets thinks there is still some value there -- of some kind.
Turning next to 10-Ks, we learn the strategic plan: "create strong digital lighting brands... [which] will deliver... [a] user base that is less price sensitive." LSG wants to "streamline the processes used in introducing new products," and plans to "reduce... cost structure." And to accomplish this, it is "transition[ing] manufacturing of our high-volume low-mix lamps... to China... fully completed in the first half of 2014." This is exactly what I recommended in my blog -- substantially reducing costs and increasing sales price.
Financials
And now the financials. For the nine months ended Sep. 30, 2013, its cost-of-goods was $65 million and its revenue was $62 million -- thus, just as has been widely supposed, it's been selling at negative margin. The situation was the same in 2012, when it sold $101 million and had a COG of $118 million. And in the third quarter the numbers were $27 million and $22 million. This answers the question of how much money LSG has been wrapping around each bulb -- each $10 bulb it sold cost it $12.27.
Since in this last quarter it reported the worst margin of all, it's doing worse than before. And notice how dramatically its sales have shrunk. But maybe that's a good thing. If you are at negative margin, you want to sell less, not more. When volumes start rising -- remember that LED sales are going up a lot this year, and a rising tide lifts all boats -- you need to be at positive margin.
What's the conclusion from all this? LSG has been losing money on sales for years. Its sales have dropped dramatically in the last year. But it is repositioning to go to positive margin, at exactly the time when the market is about to take off. It has bought some name recognition (with big-box stores, not with consumers) via its losses. And it has an investor that still believes it can make money from LSG. (Sales of units? Sale of the company? Who knows? But investors can be surprised, too.) If LSG can go to positive margin, I think it has a chance. Stay tuned.
Disclaimer: I was one of the founders of Switch, and have a financial interest in it.
Related post:
No comments:
Post a Comment