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CUI Global – what to do now?

CUI Global is a total gong-show.

When I bought stock a couple months ago I thought I was buying a lottery ticket on news that the Snam Rete tariff issue would be resolved and there would be a nice pop in the share price.

I was wrong.

I wouldn’t have thought it possible but the company managed to announce the news I had been waiting for and implode the share price in the process.

For the love of…

They pulled off this feat by announcing an a extremely large share offering at the same time. The company is offering $15 million worth of stock.  There is no pricing on the stock, but if they wait a few more days maybe it will be a 99c special <rolls eyes and shakes head>.

In all seriousness, I’m underwater, the news I was waiting for is out, and the stock didn’t do what I thought it would do.  So what do I do now?

I have to admit my temptation was to sell.  Especially given that this event does not shine a positive light on management.  I don’t know if the selling is related to the offering (Craig Hallum often seems to be associated with these sort of crazy stock moves coinciding with a placement that they facilitate) or if its just a pissed off institutional holder that wants out, but at the end of the day its on management for making a decision that led to a full collapse in the price of the stock (it was a $4 stock like 5 days ago!).

Anyways I decided to stick it out.  I also added to my position yesterday and today.  Here’s why.

GasPT Opportunities

First the opportunity presented by GasPT is legitimate.  And the opportunities on the radar are extensive.  The following table outlines what CUI Global has talked about on conference calls and during presentations at investment conferences that I have listened to:

Potential Near-term Revenue from these Opportunities

Of these opportunities, the one’s that are most likely to be near term, or accretive to 2018 or 2019 numbers, are:

  1. Snam Rete analyzer current order
  2. Engie biomethane skids (analyzer and RTU)
  3. Snam Rete first stage of odorizer order

The quarterly revenue from these 3 products are in the table below.  I made assumptions about monthly units based on managements (admittedly vague) comments about delivery time frames on conference calls for each project.

Of these projects, we now know that the Snam Rete analyzers will start being delivered in “early 2018”.   My quote is from news that was supposed to move the stock up but didn’t.

Energy and GasPT Gross Margins

I needed to get a better handle on GasPT gross margins.  Energy gross margins have fluctuated over time depending on how much engineering work CUI is doing and how much product (ie. analyzers) they are selling. Product revenues have higher margins so more GasPT sales are going to raise energy margins as a whole.

There have been enough quarters where energy revenue has been all engineering work to know that this work has margins of about 35%.  Based on known Snam Rete shipments over the first 3 quarters of 2016 I backed out what gross margins are (at least roughly) for GasPT analyzers.  It turns out to be 59%. I came up with  this by comparing the quarters where CUI Global saw Snam Rete revenue and the quarters where they didn’t in the table below:

Earnings

Once I had an idea of GasPT margins and volumes, coming up with how this plays out into earnings is pretty straight forward.  I made the following assumptions:

  1. CUI has over $100 million of NOLs so they won’t be paying taxes for a long time
  2. G&A is expected to decline $1.5 million annualized after a small restructuring in the first half of 2017
  3. The power business is doing well. I’m projecting 5% growth for the Power segment over the next year compared to TTM numbers
  4. I assume the Energy (ex GasPT) and Power segments to operate at 35% margins, which should be conservative against historical comps. The company guided to 40% Power margins in the second quarter.

I looked at two scenarios.  The one that I illustrate in the table below assumes GasPT revenue is only from the Snam Rete analyzer order.  This is 300 units per quarter or 1,200 units per year.

The numbers are annualized.  I’m doing my per share calculation before the offering, so I am using the 20.9 million shares outstanding right now.  And the trailing twelve months (TTM) are ending with the second quarter.

Conclusion

In my opinion, my biggest risk is that I don’t understand why the company is issuing stock.  It doesn’t make sense.  Its possible that when the reason comes out I will get to do another face plant.

At the very least we know there is going to be dilution.  Its going to be significant (maybe 30% if the placement is done around the current price?).  However there is also going to be a lot of cash on the balance sheet and the company will be debt free.

Its hard for me to ignore the earnings potential.   The numbers I ran through in the scenario above only assume the Snam Rete order. When I looked at a second scenario that assumes all 4 of the potential near term opportunities come to fruition, I get earnings of $1 per share pre-dilution.

There is also the future billing project from the UK to consider.  The company announced last week that the project was progressing into a second stage.  While revenue is still a couple years off the number of potential GasPT units for this project (45,000) are staggering.  I didn’t bother to work out a scenario for this one because the number would just sound stupid.

So there you go. I doubled down my bet.  Sometimes that works and sometimes it blows up in my face.  I put the work in to justify my decision, at least to my own satisfaction.  We will see where the chips fall.

 

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My REE Bet: Lynas Corp

When I was looking for ways to play the price rise in rare earth elements (in particular neodymium and praseodymium, or NdPr) I almost skipped by Lynas Corp.  It traded on the Australian market (where I cannot buy stock) and the OTC market in the United States (where I don’t like to buy stock).  It was a penny stock.  And when I dug into the story I found there were over 4 billion shares outstanding!

It didn’t strike me as an ideal vehicle.

But after scouring through the REE universe, I came back for another look.  I had to.  The thing is, the company is pretty much the only miner of rare earths outside of China.  I found some companies with deposits, and some with technologies for better extraction, but there aren’t really any other options if you want a company that is going to see direct upside from the price rise of NdPr in the near term.

Background

I mentioned in my last post that mining rare earths is difficult.  The history of Lynas is an example of that.  The company started mining at its Mt. Weld mine in 2013.  It was immediately plagued with operational problems.  This wasn’t helped by collapsing prices for rare earths.  The stock, which peaked at over $2 during the rare earth boom of 2011, collapsed into its current penny stock status:

As I read about the company’s history the theme that came across was that they were an operating disaster until the current CEO, Amanda Lacaze, came on board and began to turn things around.  Since that time she has slashed production costs and restructured a crippling debt burden.

“When I joined, production was unstable. We had high costs and were very cash consumptive. We had to reset our cost base and improve our operating performance while dealing with a market that was significantly less profitable than before.”

The company started to see better results in 2016.   Then, in October 2016, they restructured their debt and reduced interest significantly.

Unfortunately, along with the restructuring came dilution. The strike price on the existing convertible debt of $225 million USD was reduced to 10c AUD.  This meant that full conversion of the debentures would result in 2.67 billion shares being created.

But that’s what you get when you are trying to survive.  The important thing is that they did survive.  Now are the company best positioned to thrive as the REE market recovers.

Capitalization

Fully diluted Lynas has 7.1 billion shares.  Once the convertible debt is gone (it undoubtedly will be converted into the stock) $200 million in long term debt will remain.  The fully diluted market capitalization when I bought the stock (at 16c) was about 1.1 billion USD.  They have $67 million ASD of cash.

Operations

The company has a single operating mine, Mt Weld. The mine produces material via the Central Lanthanide deposit.  Reserves at Central Lanthanide are 9.7Mt of rock at a 10.8% rare earth oxide (REO) grade (from this report).  Below is a table of reserves at Central Lanthanide:

In addition to reserves there is another 15Mt of resource at Central Lanthanide at 8.8%.  A second, underground deposit called Duncan has 8.2Mt at 4.7% REO grade.

The deposits host a fairly typical distribution of REOs:

Ore is mined from the Central Lanthanide deposit and taken through a flotation circuit on-site to get a rare earth oxide concentrate.

The concentrate is shipped to Malaysia for processing.  The company has an advanced materials plant in Kuantan, Malaysia where the concentrate goes through chemical processes like cracking and leaching and solvent extraction to separate the individual REEs from solution and create an end product oxide.

The plant in Malaysia has been controversial. Some locals in Kuantan don’t want an REE processing plant in their back yard.  At the time it was built, maybe in part because of the REE mania that was in full force, it became a media story.  The protests held up development.  As this report points out:

The campaign managed to attract a lot of international media attention and stopped bigger contracts being pursued by major buyer. Lynas share values plummeted due to negative publicity and financial risks and because prices of rare earth elements dropped.

I can’t be sure of course, but it seems like some of the conflict has died down.  I can only judge that the media stories I have read (which admittedly are in English and so may not be representing the entire picture) are more balanced and less common in the last few years.  However I did see a comment that the upcoming Malaysian election this year could refuel some of the protest

Production

As Lynas has gotten the levers of production under control, volumes have improved.  At the same time direct mining costs have dropped by about one-third since 2015.

The Mt Weld mine produces 2kg of other REEs for every 1kg of Nd.  In Fiscal 2017 the mine produced 5,200t of NdPr.

While NdPr accounts for one-third of the production from Mt. Weld, it is the source of most of the revenue.  Sales in 2017 were $257 million AUD.  Sales of NdPr were around $225 million.

What’s the Upside?

The upside here is leverage to NdPr price increases.  Below are NdPr quarterly prices from the Lynas full year report ending June 30th.

There was a slow but steady uptrend in prices.  Since June, however, prices have jumped significantly.  I talked about reasons for the jump in prices in my last post.

FOB prices excluding VAT reached $65 USD/kg over the summer.

What’s really fun about mining companies is that their costs are essentially fixed with volume.  So when a company sees a step change in price, the incremental revenue goes straight to the bottom line (less any taxes of course).

Every $10/kg change in price with 5,200 tpy production is about $50 million USD of extra operating cash (before tax) beyond what they currently generate.  Lynas is hinting that they can get to 6,000 tpy of production, which would add another $8 million USD per $10/kg on top of that.

Here was an estimate I found from one analyst that gives a picture of sensitivity of net asset value to changing NdPr prices.

A second analyst, Newgate Capital, forecasts $230 million of free cash flow using  $70/kg for NdPr prices.

Worth noting is that in the Newgate estimate assumes a 30% tax rate.  In note 12.2 of the year end financial statement the company notes the very large unrecognized deferred tax assets that are carried ($785 million ASD, from years of losses).  I am not positive how efficiently these can be utilized, but they should represent significant tax credits.  So I think (and I might be wrong) that most of the operating cash flow will go straight to the bottom line for at least a few years.

Buying the stock on the OTC

There are two symbols for the stock, LYSDY and LYSCF.  The former is an ADR and the latter is an OTC traded share.  I don’t think there is any real difference between the two; they are both 1:1 Lynas share equivalents.  But the ADR is typically more expensive.  I think this is because it’s more liquid.  I haven’t had much luck buying the OTC traded share, even when I put in a bid above current it often gets ignored.  Maybe its my brokerage?  While I have a few shares of LYSCF, I have mostly paid up for the ADR.

Conclusion

There are risks here.  One risk is that Lynas Malaysian plant has not been without controversy.  There is always the chance that Lynas becomes a political football in Malaysia, especially given any upcoming election.

A second risk is that REE mining and extraction is hard.  It’s the bull case and the bear case.  Just as I think its going to be difficult to see much of a supply response, there is always the potential that Mt Weld has a hiccup.

There is also the potential for technological advances that limit the use of permanent magnets in the growing electric vehicle or wind turbine applications.

A fourth risk, maybe the biggest, is that the whole story depends on China.  There’s no question that China can derail the REE rally if they decide to loosen the reins on illegal mining or flood the market with stockpiles.

But as I pointed out in my previous post, there are reasons to believe that won’t happen.  I’m coming around to the idea that the price of NdPr has, over the last few months, not so much as spiked as it has started to re-establish a supply/demand equilibrium that will encourage investment that is not illegal and not environmentally toxic.  If that’s the case, then its sustainable, and there is a lot of upside in Lynas in my opinion.

Keep in mind that even with the jump in prices, NdPr is still below what it was at a few years ago and not even close to the bubble levels it reached in 2011.

I don’t want those bubble levels to return.  That wouldn’t be in the best interests of anyone, as demand would be destroyed.  But I would be fine with a consistent rise on the back of rising magnet demand.

As well, given that Lynas is the only producer outside of China, and given that in the past various governments have raised the issue of REE dependency.  There was this 60 minutes segment from 2015 (as an aside, sort of, I would highly recommend tuning into this documentary, in particular to check out the horrible scenes of the landscape around Chinese REE mines and description of the “relocation of entire villages” around the 6 minute mark.  It gives me resolve in my thesis that China will be firm about ending this sort of mining).

More recently the DOD looked for ways to manage the “national security risk” posed by the REE supply chain.  The collapse in price has mostly alleviated these concerns.  But with prices rising again, it would see to me that a company like Lynas, with operations outside of China, should command some sort of a “rareness” premium (pun intended).

Look, I could be wrong about this.  Lots of things could go sideways.  I’ve tried to outline a few.  But if they go right I think the stock has significant upside.  So I’m willing to make a bet.

REEs: Another way to play the EV Ramp

There are a lot of ways to play the boom in electric vehicles.  There is lithium.  There is graphite.  There is cobalt.  And there is nickel.

I have invested in a number of companies levered to these EV minerals.

  • Bearing Lithium, Albemarle and Orocobre for lithium
  • Sherritt for nickel and cobalt
  • Leading Edge Minerals which has a graphite operation they are trying to get qualified for battery grade graphite
  • A bit of a takeoff on the battery idea with a Vanadium producer called Largo Resources
  • A zinc play, Acendent Resources, where the electric vehicle ramp could have an impact but its not core to the investment thesis

In addition, there is one other play I have on the electric vehicle theme: Rare earth elements.  I have taken a position in a company that produces them, Lynas Corp.

I’m breaking my discussion up into a couple blog posts.  In this post I’m not going to talk too much about Lynas Corp.  I’m going to focus on the rare earth market. I will talk about Lynas later.

But Lynas is core to the thesis.  In fact the EV story for rare earths is probably not as strong as the story for lithium or cobalt. But Lynas is in a unique position and trades reasonably, and that makes up for it.  So I’ll mention a few points about Lynas before I start talking about the rare earth market:

  1. With a single mine in Australia (Mt. Weld) Lynas is the only rare earth producer outside of China right now – seriously…the only one
  2. Lynas looks incredibly expensive on backward looking metrics that use average prices over the past few years
  3. Lynas will generate a lot of free cash if the price of Neodymium oxide and Praseodymium oxide stay at the level they are at right now.  If prices rise further the numbers get very large

With that brief introduction to Lynas, lets talk about the rare earth market.

Rare Earth Elements

I’m not going to spend a bunch of time talking about what rare earths are, how they are classified and all that stuff.  You can look it up on Wikipedia if you are interested.

What is important to know is this:

There are a few rare earth elements that can be used to make magnets.  In particular neodymium, when combined with iron and boron, can be used to make a Neodymium-Iron-Boron (NdFeB) permanent magnet.  In addition praseodymium (Pr) and to a lessor extent dysprosium are used in permanent magnets. Praseodymium can be substituted for neodymium up to about 25% of content in the NdFeB magnet.  This is done if the neodymium price gets too far ahead of the praseodymium price.  It also improves corrosion resistance.  Combined neodymium and praseodymium supply is often described as NdPr, given their linked nature.

While there are other metals you can put together to create a permanent magnet, the NdFeB magnet is superior because A. it is stronger and B. it is primarily made from iron, which makes it relatively cheap.

Rare Earths and EVs

REEs are not the highest intensity way of playing the EV growth story.  The demand numbers aren’t going to “wow” you like they do for lithium or cobalt.  The introduction of electric vehicles is an important part of the rare earth bull case, but its not the only element of it.

The chart on the right from UBS demonstrates the impact of a full EV world on rare earth demand:

While the rare earth content doesn’t show up on the chart on the left, that is because rare earths are used in relatively small amounts in all applications.  A Chevy Bolt will have about 1kg of Neodymium in its engine due to the use of a permanent magnet in the electric traction motor.

The NdFeB magnet is used in the electric traction motor of almost electric vehicles.  In 2016 89% of EV’s and hybrids sold used a permanent magnet motor.  The motors are “unbeatable in delivering torque and overall power by weight, and suffer less electric and mechanical losses, and have a simpler rotor/stator configuration” (from this report).

In fact, every EV manufacturer is using a permanent magnet in the engine other than Tesla.  Tesla has been using an AC induction motor.  However, recently Tesla announced they would be switching to a permanent magnet on their Tesla 3 long range model and I have read anecdotes that the change could be made globally to all Model 3’s.

In addition to the larger electric traction motor, there are about 20 other motors in an EV that use an NdFeB permanent magnet.  In total an EV will use about 1.5kg-2kg of NdPr, with about 1kg of that being in the engine.  This is an incremental of 1kg-1.5kg over an internal combustion engine (internal combustion engines still uses about 0.5kg of NdPr throughout the vehicle for various smaller motors).

Wind Turbine Demand

Electric Vehicles are one piece of the demand story.  The other piece is wind turbines.

Global installed wind capacity has been growing significantly over the past decade.

Given that wind is now cheaper than gas turbines in many locations wind installation is forecast to continue to grow, at 11.5% CAGR, over the next 30 years.   The following is a near term capacity growth estimate from the Global Wind Energy Council:

Hybrid drive (HD) and direct drive (DD) wind turbines use permanent magnets to convert the wind energy into electrical power.  They are an improvement over traditional gear box systems because they are lighter, quieter, more efficient and require less maintenance.

A hybrid drive requires about 70 kg of Neodymium.  A direct drive requires about 210 kg.  I get these estimates from this report, which provides an extremely good dive into the entire sector.

Adding up demand

To come up with a rough idea of where NdPr demand is going, I used the consensus uptake of electric vehicles, growth in wind turbine capacity and an underlying growth in demand from other applications of NdPr of 2.5%.  With these assumptions I see demand going from about 37,500 tonnes in 2016 to 54,000 tonnes in 2021.

Global consumption of NdPr is 2015 was 37,300 tonnes.  2016 was likely in the area of 39,000 tonnes.  But note that the number seems to vary depending on the source.  I saw one set of numbers for 2016 that were a little above 40,000 tonnes and another that was below 30,000 tonnes (thought I suspect this one was really referring to Neodymium demand only, even though the referenced it as NdPr).  Its an opaque market.

UBS recently estimated that they expect 3.1 million EVs by 2021 and 14.3 million EV’s by 2025.  Assuming 75% of those cars use permanent magnet motors that translates into about 3,000 tonnes of NdPr.  14.2 million EV’s, the estimate for 2025, would translate to 12,500 tonnes of NdPr (assuming the mass/unit declines from an incremental 1kg down to 0.88kg by the time this happens).

At 35% market share for HD/DD turbines of cumulative capacity growth, rising to 50% by 2020, an additional 2,344 rising to 5,591 tonnes of NdPr will be required to support incremental turbine demand.  If HD/DD market share rises further (some expect these turbines to eventually reach 75% market share) that number will grow.  At a 75% market share in 2020, over 8,500 tonnes of NdPr would be required.

While a move from 37,000 tonnes to 54,000 tonnes is significant, the demand growth pales in comparison to some of the other EV materials.  Lithium demand, for example, is expected to go from 189 Kt LCE (lithium carbonate equivalent) in 2016 to 329 Kt LCE in 2021.  Almost twice as much growth.

What differentiates the rare earth bull case from the lithium bull is that its not all that certain where additional supply is going to come from.

Looking at Supply

What I like about the REE story is that its more two sided then lithium and cobalt.  Lithium and cobalt are seeing a supply response that is most definitely occurring.  You can argue whether that supply response is going to be sufficient (I am of the mind it won’t as I think the demand numbers will end up too low and the supply will be delayed) but there is no question lithium and cobalt supplies are going to increase substantially in the coming years.

With REEs, that is not so clear.  First, there is a complete lack of mine development outside of China.  There is Lynas, which operates the Mt. Weld mine in Australia.  And there is one small development in Burundi, run by a company called Rainbow Rare Earths, that is trying to get into production by the end of this year.  But I think that’s it.

Rare earth mining is very difficult.  Processing the rare earths and separating the constituent elements can take many cycles and can be toxic to the environment if not done carefully.  Lynas took almost 5 years of fits and starts before they have finally been able to produce at a consistent level and with decent costs.

Second, rare earth have, for some time, relied on a single source of supply, China.  China supplies about 95% of rare earths. There are 6 state owned enterprises (SOEs) that legally produce REEs in the country.  These companies are given a quota by the country that they can produce 105,000 tonnes of REEs (note that this includes all rare earths, not just NdPr).

But China has been producing far above that amount for years.  They produced around 150,000 tonnes in 2016.  The difference between the official tonnage and actual production is due to illegal miners.

Illegal mining of rare earths is profitable because it is polluting and harmful to the environment.  As part of the governments efforts to stem pollution, China is cracking down on illegal mines.  The following is from this Adamis Intel note:

Adamis concludes that tightening the reins on illegal mining has lead to stockpile draw downs in 2017.   Its also led to a huge jump in the price of both Neodymium and Praseodymium (from slide 8).

With the moves taken by China, particularly given that they are part of a larger effort to reign in pollution, there seems to be more chance that REE supply from China falls then rises in the medium term.

Interestingly, Chinese companies have been buying up or taking stakes in a number of rare earth deposits outside of the country.  Here is a list of projects that have recently become affiliated with or owned by Chinese interests:

  • Shenghe Resources takes a 12.5% stake in ASX listed Greenland Minerals and Energy which owns the Kvanefjeld rare-earth-uranium project
  • Shenghe Resources and JHL Capital place winning bid for Mt. Pass rare earth mine in the United States (was the last mine to operate in the US and used to be part of Molycorp)
  • Huatai Mining invests Northern Minerals and its Browns Range dysprosium project
  • Northern Minerals sales agreement with Guangdong Raising Asset Management
  • Mkango Resources on the TSX has done two financings with Noble Resources

Its possible these are just opportunistic Chinese speculations.  But it could also be an understanding within China that soon their rare earth dominance must be tapered.  Adamis Intelligence was quoted as saying that they expected China to be a net importer of NdPr by 2025, and that demand from magets within China will significantly exceed their internal supply by that time.

Conclusion

I missed out on the first spike in REEs.  To be honest I never really bought into the thesis.  That didn’t turn out to be wrong.  The boom in rare earths in 2011-2012 was driven entirely by Chinese trade dispute with Japan, which led them to pull back on exports, which led to price spikes in a number of the minerals. When that ended so did the spike.

It wasn’t really based on demand in any significant way.

Now, however, is different.  There is both a demand story and a supply story.  Both are coming to a head at the same time.  Both have legs in my opinion.

But this is not without its risks.  The biggest risk is China.  We can’t be sure what the government is thinking and how they will direct the SOE’s to act.  We can’t be sure they will continue the hard line against illegal mining.

Maybe most importantly, we can’t be sure what impact price rises will have.  Will they cause China to back-off? China has strategic stockpiles.  These are being worked down but so far its been orderly.  Also, further price rises will, at some point, encourage substitution.  NdFeB is not the only permanent magnet and eventually if it gets too expensive, alternatives will be considered.

I’m of the mind that the spike we saw in NdPr over the summer was off of an unsustainable low.  Prices needed to rise to encourage some investment in new mines outside of China.  But I’m not sure a further spike would be constructive.  The best case scenario would be a slow rise over time. As I will talk about in a later post, that would be more than enough for Lynas.

I’ll end with this comment from an article quoting Adamis Intelligence:

The outlook for rare earth demand from 2020 through 2025, and beyond, is exceptionally promising. This period reveals that for many of today’s most highly publicized rare earth end-uses, such as electric vehicles, wind turbines, and many others, the rate of annual demand growth is poised to accelerate between 2020 and 2025, steering global rare earth demand to unfathomable new heights in the years thereafter.

 

Week 324: Underlying Conditions

Portfolio Performance

Top 10 Holdings

See the end of the post for my full portfolio breakdown and the last four weeks of trades

Thoughts and Review

The late spring and early summer months were a trying time for my investments.

I haven’t written up my portfolio in a while.  Part of that was due to the summer, being away and not having the time to do my usual work.  But I also went through a 3 month period, from mid-May to mid-August, where I lost money and struggled with why. That dampened my spirits for putting pen to paper.

Losing money is hard enough, but it is harder when you have been generally right in your decisions.   I try, like the namesake of this blog, to analyze underlying conditions and let that determine my general bent on sectors and the market.  Where there is a bull market I like to be very long those stocks, and when there is a bear market I like to pull back significantly, retreat into cash, and go short where I can.

Throughout the spring and summer I found myself in a general bull market in US stocks, one that had made me a lot of money throughout the winter.  I was, quite rightly, very long US stocks.  The market kept going up, albeit in fits and starts.  But I began to lose money.  Now I didn’t lose money quickly.  In retrospect that may have been a better route as at least I would have been forced to discover my error.  But instead my losses slowly accumulated over the months of May and June.

What’s more, I did not see noticeably poor performance from any of the stocks I owned.  Sure my names weren’t breaking out to new highs, but my core positions at the time, the likes of Radcom, Silicom, Sientra, Combimatrix, Identiv and Vicor were not by any means breaking down (I leave out Radisys as it is a separate discussion).

It wasn’t until my portfolio was down about 6%, in the middle of June, that I woke up to the fact that something was wrong.  I scoured my list of stocks but found nothing worrisome with the names I held.  I knew that the Canadian dollar had been rising so that must have been having some effect but I had never really quantified my currency exposure.  I had always thought of currency as an afterthought, something that balances itself out in the end.

As I crunched through the numbers on my currency losses, I realized that while in the very long run my theory that currency balances itself out might be correct, in the short run a currency can make or break you.  The Canadian dollar was in the midst of unwinding 2 years of gains in two months.  Measuring my losses from the portfolio top in mid-May, I was 6% down, of which 5% came from currency.

It is here that I made my first big mistake. I was armed with the information I needed to act decisively.  I knew my problem: stocks were in a bull market, but clearly the US dollar was not, and I was, rather unwittingly, very long the US dollar.

So what did I do?  Something that, in retrospect, was absurd.  I made only a token effort towards the problem, taking only the excess US dollar cash in my portfolio and putting it into a Canadian currency ETF.  This effort, while directionally correct,  impacted about 15% of my US dollar holdings and thus did nothing to alleviate the problem.  I followed this up with an even more inexplicable move, even to me looking back on it now.  I put on index shorts to hedge my long positions.

Here I was with losses proving that I was wrong.  I had determined the source of those losses.  And what did I do?  I did something that was likely only to exacerbate them.

It really goes to show how wrong one’s logic can be when you are trying to cling to what you had. The reality, I think, is I didn’t want to do what was right.  What was right was to sell my US stocks.  Not because my US stocks were going down. They were not.  Not because the theses behind these positions was not sound.  They were.  But because I was losing money on those US stocks.

Unfortunately I could not wrap my head around this.  All I saw were good stocks with strong catalysts.  How could I sell my positions?  It’s a bull market!

I spent most of June compounding my problem with band-aid solutions that only dug me in deeper. I fell back on oil stocks as a Canadian dollar hedge.  This had saved me the last few times; in the past the Canadian dollar had risen because oil had risen, so I had gone long oil stocks and my losses on currency were more than compensated with my gains on E&Ps.  I was saved a lesson and left none the wiser to how impactful currency could be.

But this time around the currency was not rising because of oil.  My appraisal that I should be long oil stocks was based on the flawed logic that what works in the past must work again regardless of conditions.  That is rarely the case.  In June and July I bought and lost money on companies like Resolute Energy, US Silica and Select Sands, all the time continuing to hold onto US dollars and lose on them.

I also went long gold stocks on the similar thesis that if the US dollar is weak then one should be long gold.  In this case I was at least partially correct.  That is the right thing to do given conditions. But my conviction was misplaced. Rather than being long gold stocks because I thought gold stocks would go up, I was long gold stocks to hedge my US dollar positions.  You cannot think clearly about a position when you are in it for the wrong reasons even if a right reason to be in it exists.  Thus it was that in late July I actually sold a number of my gold stock positions. It was only a couple weeks later, finally being of a clear head (for reasons I will get to) that I bought them all back, for the right reasons this time, but unfortunately at somewhat higher prices.

As I say it was at the beginning of August that I finally was struck by what I must do.  I’m not sure what led me to the conclusion but I think an element of deep disgust played a part.  I had just seen my biggest position, Combimatrix, get taken over for a significant premium. My portfolio took a big jump, which took down my losses from my mid-May peak from -10% (over 8% due to currency!) to -7.5%.  But then in the ensuing days I saw those gains begin to disappear.  Part of this happened because Radisys laid an egg in their quarterly results, but part of it was just a continuation of more of the same.  Currency losses, losses on index short hedges, some losses on my remaining oil stocks, and the ups and downs of the rest of my portfolio.

I simply could not handle the thought of my portfolio going back to where it was before Combimatrix had been acquired. I was sick of losing money on currency.  And I was reminded by the notion that you never see conditions clearly when you are staked too far to one side.  So I sold.

When I say I sold, I really mean I sold.  I took my retirement account to 90% cash.  I took my investment account to 75% cash.  There were only a couple of positions I left untouched.  And I took the dollars I received back to Canadian dollars.

I continued to struggle through much of August, but those struggles took on a new bent.  I was no longer dealing with portfolio fluctuations of 1%.  The amounts were measured at a mere fraction of that.   This breathing room afforded me by not losing money began to allow me to look elsewhere for ideas.

I don’t know if there is an old saying that ‘you can’t start making money until you stop losing it’, but if there isn’t there should be. When you are losing money, the first thing you need to do is to stop losing it.  Only then can you take a step back and appraise the situation with some objectivity.  Only then can you recover the mental energy, which until that time you had been expending justifying losses and coping with frustration, and put it towards the productive endeavor of finding a new idea.

In August, as my portfolio fluctuated only to a small degree but still with a slight downward slant, I mentally recuperated. And slowly new ideas started to come to me.  It became clear that I was right about gold, and in particular about very cheap gold stocks like Grand Colombia and Jaguar Mining, so I went long these names and others.  I realized that being short the US market was a fools errand, and closed out each and every one of those positions.  I saw that maybe this is the start of another commodities bull run, and began to look for metals and mining stocks that I could take advantage of.  I found stocks like Aehr Test Systems and Lakeland Industries, and took the time to renew my conviction in existing names like Air Canada, Vicor, Empire Industries and CUI Global.

Since September it has started to come together.  I saw the China news on electric vehicles and piled into related names.  Not all have been winners; while I have won so far with Albemarle, Volvo, Bearing Lithium and Almonty Industries, I have been flat on Leading Edge Materials and lost on my (recently sold) Lithium X and Largo Resources positions.  Overall the basket has led to gains.  I’ve also been investigating some other ways of benefiting from the EV shift.  It looks like rare earth elements and graphite might be two of the best ways to play the idea, and I have added to my position in Leading Edge Materials (which has a hidden asset by way of a REE deposit at the level of feasibility study) to this end.  Likewise nickel, which is not often talked about with electric vehicles and has been pummeled by high stock piles, has much to gain from electric vehicles and could see a resurgence over the next couple of years.  I’m looking closely at Sherritt for nickel exposure and took a small position there so far.

I saw that oil fundamentals were improving and got back into a few oil names, albeit only tentatively at first.  Such is the case that once you are burned on a trade, as I was when I incorrectly got into oil stocks in June and July for the wrong reasons, you are hesitant to return even when the right reasons present themselves.  Thus it has taken me a while, but over the last couple of weeks I have added positions in Canadian service companies Cathedral Energy and Essential Energy, and E&Ps Gear Energy, InPlay Oil and even a small position in my old favorite Bellatrix.  A company called Yangarra Resources has had success in a new lower zone of the Cardium, and I see InPlay and Bellatrix as potential beneficiaries.  These newer names go along with Blue Ridge Mountain Resources, Silverbow, and Zargon, all of which I held through the first half slump in oil.

I even saw the Canadian dollar putting in the top, and converted back some currency to US dollars a couple of weeks ago.

Most importantly, got back to my bread and butter.  Finding under the radar fliers with big risk but even bigger reward.  I have always said it is the 5-bagger that makes my returns.  If I don’t get them, then I am an average investor at best.

I found Mission Ready Services, which hasn’t worked yet but I think is worth waiting for.  I found some other Canadian names that I think have real upside if things play out right (in addition to the above mentioned metals an oil names, I added a position in Imaflex). Most profitably, I was introduced to Helios and Matheson after reading an article from Mark Gomes.

I don’t completely understand the reason why, but good things do not come to you when you are mired in a mess of doing things that are wrong.  It is only when you stop doing what is wrong that other options, some of which may be right, will begin to present themselves.

I also don’t know which of what I am doing now will turn out to be right, and what will turn out to be wrong.  I will monitor all my positions closely and try to keep a tighter leash than I have been.  What I do know is that I will not continue to be wrong in the same way I was through the months of May to August.  And that is a big step in the right direction right there.

Portfolio Composition

Click here for the last eight (!!) weeks of trades.  Note that in the process of writing this update I realized I do not have a position in Gear Energy or Essential Energy in the practice portfolio.  I have owned Gear for over a month and Essential for a few weeks.  This happens from time to time.  I miss adding a stock I talk about and own in my real portfolio.  I added them Monday but they are not reflected below.

Note as well that I can’t convert currency in the practice account.  I know I could use FXC but in the past I haven’t, I have just let the currency effects have their way with the practice portfolio. Thus you won’t see the currency conversions that I talked about making in my actual portfolio.  I may change this strategy the next time the Canadian dollar looks bottomy but as I am inclined to be long US dollars at this point, I’m leaving my allocations where they are for now.

Catching a moonshot with Helios and Matheson

Every once in a while I get one right at just the right time. It doesn’t happen often, but it certainly is nice when it does.  Such has been the case with Helios and Matheson.

I owe this idea to Mark Gomes.  His article led me to the story.

Before I start this post, let me just say I am pained to write about a stock that has gone up so much.  I don’t intend this to be an endorsement of the stock at this level, particularly in the short run, as it could as easily drop as rise 10% or more today (I see the stock is down almost 15% in pre-market on this news, which doesn’t seem all that bearish to me at first glance).  Nevertheless my thought process in this particular case is worth recording and that is what the intent of this blog really is, so here it goes.

I’m not going to step through the story in this post.  There are plenty of other places where that has already been done, both in Mark’s article and this one here.  There is also a good two part series interview with the CEO of MoviePass on the Forbes website (part 1 and part 2).

After learning about the story, I spent all of Monday delving into it.  With some trepidation I bought stock in the $3.50’s and then watched the price rise and then fall back to below where I bought it at the end of the day.

On Monday evening I spent a significant amount of time deliberating about my position.  There were at least a couple of times where I was on the verge of selling my shares first thing Tuesday morning.

Why such anxiety?  Because it is not an easy story to accept at face value.  The business model, essentially selling unlimited monthly passes for movie tickets (the only limit being one purchase a day) is, at least on the surface, a wildly unprofitable proposition.  Every time a customer goes to a second movie, MoviePass loses money on that sub.

This is why, and not without good reason, the company is derided on twitter by most of those with a serious take.  Its very easy to conclude that MoviePass is destined for bankruptcy.  I made a single tweet about the company today (I was afraid if I made more my inbox would see a deluge of nastiness) and the first response I got was ‘it’s called a Ponzi scheme’.

I don’t believe that a Ponzi scheme is quite the right parallel even if things do go awry, but I admit I have no crystal ball to say that all will end well with MoviePass.  Nevertheless I held more than half of my shares today, even as the stock rose some 60% (I admit I did sell some shares, you just have to after that kind of day).

But why did I hold most of what I owned?  Well some of it was momentum, the low float, the past fluctuations in the stock (it rose to $17 last summer, albeit with a much lower share count), but those reasons alone aren’t enough.  There are always circumstantial reasons to stick around.   What gave me the conviction to stick to the stock, to not sell at the open, or when it was up 10% or 20% on the day, was a shift in how I started to think about the stock on Monday night.

Those with harsh criticism of MoviePass are thinking of it as an established business.  It can’t be profitable right now; they are paying full price for tickets and every additional theater goer adds losses to the bottom  line.  The losses are going to accumulate and the company is destined for bankruptcy.  That is the chorus.  That is also how I was thinking about the stock when I was ready to cash out Monday evening.

But what if we start thinking about MoviePass like a start-up.  An early stage start-up doesn’t worry about monetizing.  They worry about disruption, growth and capturing market.  I’m no VC, and maybe this is just me being naive, but it seems like the thesis with many start-ups is that by the time they are ready to monetize, they expect to be big enough that options will present themselves that are not identifiable just yet.  And sometimes that logic is correct.

MoviePass has went from 16,000 subscribers to 400,000 subscribers in a month.  It is undoubtedly going to be much higher in another month.  While I don’t know exactly how they can monetize their subscriber base, I do think that their options (and leverage) increases as their base grows.  Maybe they will be able to leverage their size against the bigger chains.  Maybe the early adopting chains will show such growth that the larger chains will relent.  Maybe ancillary revenues at theaters will increase to a point where it’s a win/win for all.  Maybe they can leverage their data analytics, identifying preferences of card holders and promoting features based on those tastes.

To take a “for instance”, long before I was introduced to Helios and Matheson or MoviePass I read a piece that talked about how important concessions were to the theater business.  The article explained how much money movie theaters made from concessions.  Prices are high and margins are big.  A big part of the business model depends on filling as many seats as possible.  Yet theaters are often far from full.  MoviePass is tailor made to address this problem.  MoviePass is monetizing otherwise empty seats in a way at least somewhat analogous to how the original model for Airbnb monetized empty beds, or how Uber monetized empty cars.

I think its worth noting that there was a NY Post article this morning saying that while AMC has expressed hostility towards the MoviePass model (as they are reeling after being just about to launch their own subscription package), “Regal and Cinemark have taken a wait-and-see approach to the $10 plan.”

Helios and Matheson paid $27 million for a 51% ownership in MoviePass back in mid August.  There is a clause in the agreement they signed with MoviePass that preserves their 51% ownership, even in the event of further issuance of shares.  As I mentioned, at the time of the transaction MoviePass had 16,000 subscribers.  So Helios and Matheson paid $2,500 per subscriber.

Is that valuation realistic?  If it is, then you can do the math on 400,000 subscribers.  If its not, and it seems a little steep to me, then what should a subscriber be worth?  I guess if you think the company will do nothing but lose money then its an easy answer and that number is pretty much $0.  But if you think they are going to be able to monetize their base, then it’s a worthwhile question.

After the run up to a little under $6, Helios and Matheson has a market capitalization of about $75 million including the dilution of the convertible notes and warrants they offered as funding for the MoviePass transaction.

At that price, the current subscriber base, which again increased about a bazillion percent in the last month, is being valued at $375 per subscriber.  If (when!) MoviePass doubles that subscriber base, its $185 per subscriber.  The company thinks they can get to 2 million subscribers. If that happens then we are at less than $75.

Those numbers do not seem out of line to me.  Particularly when the options available for monetization are likely increasing as this base grows.

I know I am going to get a lot of feedback on this post.  And I am going to be told how stupid my reasoning is.  So let me remind the reader that one of the tenants that I try to keep is to hold both sides of the argument in my head at all times, and not to commit to either side fully.  This is never more the case then it is here.  I see both sides.  I understand that the optimistic view of MoviePass might be wrong.  And I’m willing to change my perspective.  If I didn’t own the stock already I would be pained to buy it here, but that is mostly a factor of knowing my own psychology and that I would be whipsawed out on a correction.  However already holding the stock, I am willing to give it some rope as I do see a path.  Maybe its blurry but its there, and the market is telling me that path is being cleared.  So I will stick with it for now.

Getting on the EV Bandwagon

I have taken small positions in a number of EV related mining stocks.  As I tweeted on the weekend, the catalyst to these additions were comments out of China about accelerating the move to electric vehicles.

 

 

In this post I’m going to briefly go through the positions I’ve taken.  In a later post I will talk in a bit more detail about the one position (well two actually) that I think is the most interesting to talk about (the two companies, which soon will be one, are called Bearing Lithium and Li3 Energy).  Note that I bought many of these positions earlier in the week, and some have run significantly higher since then.  While I’m still holding all of them, they are in some cases less attractive now then they were earlier in the week, at least in the short term.

Albemarle (ALM) – They are the easiest way to play Lithium.  They are a large producer.  They are also expensive, trading at over 15x EBITDA.  But I didn’t think I was going to get them any cheaper given the news from China.

Lithium X (LIX) – They have 20 % ownership in a deposit in Argentina.   The deposit seems to have reasonably good Lithium concentration (500 mg/L).  They are in the process of a feasibility study.  The deposit is right in the middle of a Lithium corridor, with mines from SQM, Albemarle and Oro cobre.  They also have a 20% ownership in Pure Energy Metals, which has a lithium deposit in Nevada.  They have a $200 million market capitalization.  Here is the company presentation.

International Lithium (ILC) – This one is a bit of a flyer.  Well, they are all flyers but this one more than the others.  They have a 20% ownership in a deposit in Australia as well as some early stage properties in Canada and Ireland.  The lithium concentrate grade of the Australian deposit is low but the size is decent.  Ganfeng Lithium, which is a lithium manufacturer in China, owns 17% of the company.  TNR Gold owns 15% and management owns 14%.  They have an $11 million market capitalization.  Here is the company presentation.

Largo Resources (LGO) – They have a Vanadium mine. Vanadium prices have taken off recently, the latest numbers I can get has prices pushing $11/lbs, after averaging under $6/lbs in the second quarter and even less earlier in the year.  The stock has moved a ton, and has moved another 20% since I bought.  But if you run the numbers at $11/lbs Vanadium its still only at about 6x cash flow.  Vanadium prices have spiked even higher in the past.  I saw one chart that briefly put them over $20/lbs.

Leading Edge Materials (LEM) – I have always enjoyed listening to Jim Dines and he has been on the lithium/rare earth band wagon for some time.  So when I started looking for rare earth stocks I went straight to google and typed in his name.  Leading Edge is his recommendation.  They have a graphite mine and processing facility in Sweden that appears to be nearing production of battery grade graphite.  Graphite makes up 40% of a EV battery by mass.  They have prospects for lithium and cobalt in Sweden/Finland.  They also have a rare earth elements project in Sweden that they released news on today that appears encouraging.  Leading Edge has a $65 million market capitalization.  Their company presentation is here.

Bearing Lithium (BRZ) and Li3 (LEIG) – These two companies will soon be one, as Bearing is in the process of taking over Li3. Li3 has been cash strapped but owns 17.7% interest in a lithium deposit in Chile.  I think of all the positions I’ve taken, I am the most excited about this one, as they appear very cheap compared to other juniors but I haven’t found a good reason for why, other than that Li3 has languished on the OTC and is cash strapped.  I’m going to write this one up in more detail.  If you want a heads-up on that, check out my recent Stockhouse posts on their bullboard.

Why I was willing to add to Mission Ready Services

Yesterday and today have been busy.  I got smacked on Empire Industries and on Blue Ridge Mountain, but also piled into a number of lithium, vanadium and graphite names that has helped claw some of those dollars back.  I will write about those names another time.  Today I was also working on a second post on Mission Ready Services and I wanted to get that out before anything else.

I wrote about Mission Ready Services on Friday.  Over the weekend and yesterday I spent a lot of time researching the company.  The basic question I wanted to answer was whether the company, and its recent news release, are legitimate?

I may yet be proven wrong about this, but so far I do not see anything to make me think it isn’t.

To recap, the news released last week had the following points:

  • Agreement is with a US based contracting party
  • Agreement is for purchases to a large foreign military.
  • Minimum Purchases as per agreement are (USD): Year 1 (2018), $50MM; Year 2 (2019), $50MM; Year 3 (2020), $100MM; Year 4 (2021), $100MM; Year 5 (2022), $100MM.
  • Advance Payments: Distributor agrees to pay Mission Ready (the “Manufacturer”) a down payment equal to forty percent (40%) of the purchase order amount within 10-days of submitting the purchase order.
  • Exclusivity: Manufacturer appoints Distributor, on an exclusive basis, as its sole distributor for the defined territory.

So its huge if it’s the real deal.

As I have dug into Mission Ready, I have actually been quite surprised with the strength of the company’s product.  Here is what I found.

In 2011 a company called Protect the Force (PTF) partnered with the U.S. Army Natick Soldier Research, Development and Engineering Center (NSRDEC) in an attempt to develop a better body armor.  This was in response to soldiers complaining about the bulk and discomfort of existing body armor options.

Together PTF and NSRDEC came up with a new body armor called the Ballistic Combat Shirt.  This article talks is detail about the ballistic combat shirt, describing the creative design that was a departure from existing body armors available, how it benefits soldiers, and some of the awards that it has won.  It references Robert DiLalla, who led the team on the NSRDEC side that partnered with PTF to develop the body armor as well at PTF themselves.

There doesn’t seem to be too much question that the Ballistic Combat Shirt (which Mission Ready has called Flex9Armor for their own product distribution) is better than its predecessors.  DiLalla comments that its “35% lighter, form-fitting and more comfortable”, and reduces the soldier’s thermal burden compared to the Interceptor Body Armor system.  Soldier acceptance has been terrific:

“The Soldiers have spoken loud and clear with more than 90 percent user acceptance in multiple user evaluations,” said DiLalla. “Typically, as we assess new body armor components, we’d consider 60 percent a successful number. So we were quiet surprised…”

There is also a video on Youtube of the armor being tested.

In 2012 Mission Ready merged with PTF, and along with them, acquired their development activities.

In May 2015 the development of the new armor was complete and Mission Ready said the US Army Contracting Command was soliciting bids for the Ballistic combat shirt.  PTF bid on the contract.  The company sounded quite optimistic in the press release.  However it was not to be.   In July 2015 they issued another press release saying that they had not won the contract with the US government.  They met all technical requirements but did not have the lowest price (there is a table below that will show the pricing breakdown).

Being the co-developer of the product, this must have stung.  In response PTF filed a protest.  The outcome of the protest was sustained, as described in a December 2015 news release.

“We recommend that the Army either: (1) reasonably re-evaluate the proposals in accordance with the RFP as written, and make new source selection decisions; or (2) re-examine the RFP’s minimum requirements and evaluation criteria, to determine whether they accurately and unambiguously reflect the agency’s needs, and, if appropriate, amend the RFP, re-open discussions, obtain and evaluate revised proposals, and make new source selection decisions.

The GAO decision on the protest also outlined the original bidders on the BCS.

But nothing much has come of it since.  According to this article, the new armor is being rolled out to the US military in 2019.   PTF isn’t supplying the initial order of the product.  After the December news release articulating that they had won their protest, there was nothing further on the matter.  I think a company called Short Bark Industries (second from the top in the table above) won the bid.  I note this article, which describes the suppliers that Short Bark is using to fulfill its order of BCS, and these government contracts (a government contract for $8.86mm, here for another $15mm, and another for $6mm).  Its worth noting that these contracts are for orders until June 2019 and all orders have been obligated, which means they are filled.  Its also worth noting that, at least from what I can tell, Short Bark is in bankruptcy proceedings right now.

But Mission Ready has kept rights to distribute the armor elsewhere.  The patent on the ballistic combat shirt lists them and the US government as assignees, though I am not sure whether that means Mission Ready actually holds the patent, or whether the patent belongs solely to NSRDEC.  In November 2015 Mission Ready signed an agreement with NSRDEC that gives them exclusive rights to market the Flex9Armor to governments outside of the United States and to other organizations within the United States.

In February of 2016, Mission Ready announced the launch of their version of the Ballistic Combat Shirt, called Flex9Armor.  The armor retails for $500-$600 USD (its worth noting that sometime in the last couple weeks a change was made whereby the retail armor can no longer be ordered on the website).  As described in the news release:

Co-developed with the US Army Natick Soldier Research and Engineering Center and launched by Protect the Force Inc., the Flex9Armor tactical solution is ideal for breaching operations, tight spaces, first-responder protection, and training exercises.  While the Flex9Armor is designed specifically for physically demanding conditions, the low-profile ‘exoskeleton’ design maintains comfort and full functionality for greater articulation in the shoulder and deltoid region.

Since that time not too much has happened in the way of contracts.  Mission Ready has added other products to its portfolio (they acquired a company called ForceOne, announced a small contract for Riot shield covers, and established relationships with the government on a couple of other product developments such as a safety vest for sailors) but revenue from any of the products has been lacking.  Until, of course, the recent news.

The order is so big, it seems most likely that is is from the US government.  The “foreign military” in the news release throws me off that trail, but it is a Canadian listed company, so maybe the US counts as foreign?  Edward Vranic wrote something up last week speculating as much.  As I pointed out, the winner of the previous contract with the US government, Short Bark, appears to be in bankruptcy, which seems coincidental.  But I see nothing about a new tender by the government as of yet, and there is nothing yet in the government contract list.

In some potentially related scuttle that I have to warn you I can’t confirm, there have been some comments on Stockhouse about a 10 year Egyptian contract that they are near finalizing.   Its a bit of hearsay because the presentation that discussed this has been modified.  There was apparently an early version of the August presentation that said they are “finalizing teaming agreement in EagleShield International/Tactical Elite Systems in Egpyt for a 10 year deal that Protect the Force would supply body armor for Egyptian military and later law enforcement”.

In the revised version of the presentation (with the reference to Egypt deleted), on slide 25 it says more generically that “Multiple foreign military and law enforcement opportunities identified since the beginning of 2017– Initial shipments expected to commence in Q4 2017”, which is still a pretty bullish statement.  The same slide also says that Mission Ready is “partnering with ADS Prime Vendor on Air Force Carrier and Armor project” (this one hasn’t been deleted).

The bottom line for me is that if the distribution agreement is legitimate the stock is significantly undervalued.  A contract that delivers $500 million over 5 years is clearly worth more than a $25 million market capitalization.  While I can’t be positive that the distribution agreement will lead to those kind of revenues, there are plenty of signs that it could.  I was however wrong when I implied on Friday that this was binding, it’s not.  It’s a distribution agreement, so what really matters is the first purchase order from that supplier and the subsequent funds from that order (40% of which are required to be delivered 10 days after the PO).

I added some to my position yesterday.   The product is there without a doubt.  The design team they have at Protect the Force is technically sound, has developed other products for the military, and received awards for their work.  The CEO, Jeff Schwartz, has a background in manufacturing and so that gives me some comfort (there is a Youtube video of both Schwartz and CTO Francisco Martinez talking about the company here).  Nevertheless I still have questions about manufacturing in those quantities (the distribution agreement implies quantities exceeding 100,000 per year), but they were in the running when bidding on the vest manufacturng a few years ago, and their bid was described as technically acceptable, so I would expect there is a plan for manufacturing.  Most important, I still want to see a PO.

I can’t say with 100% certainty that things will go forward as hoped, but there are enough signs that I’m willing to scale up my bet a bit.