Monday, December 28, 2015

WPCS undergoes major restructuring

WPCS International (WPCS) has been in a death spiral for the last decade, falling from around $2000 per share in 2010 to around $1.50 now (split adjusted).  That is about 99.9% of the market cap lost.  Amazing.

I suppose there's two ways to look at that chart.  One view is of a falling knife to avoid.  The other view is of opportunity. 
Heck, even in the past year the stock has lost three quarters of its market cap.


Let's go over what it takes to turn around something like this.  For one the company must be selling a product, or addressing a market, with a future.  Of course we'd like cash and limited/no debt.  Management must be capable, incentivized, and willing to do what's necessary.

First, some highlights:
  • share price ~= $1.50
  • 2.6M shares outstanding (more on this below)
  • market cap = $4.1M
  • BV = $1.1 per share
  • revenue = $6.4 per share if you annualize the latest 6 months
  • cash = $0.96 per share
  • no debt

The Market: 
WPCS provides low voltage communications infrastructure contracting services to the public services, healthcare, energy, and corporate enterprise markets.  I don't see this market shrinking at any point in the near future.  This market will grow so it's up to the company to capture that growth.

In Nov 2015 WPCS announced they are entering the security market in Texas:
WPCS International Incorporated (NASDAQWPCS), which specializes in contracting services for communications infrastructure, today announced that it will be expanding into the Texas market for security integration and low voltage communication, as part of its strategic growth plan.
According to Interim CEO, Sebastian Giordano, "Security integration is a natural extension of our existing contracting business, providing opportunities for higher margins and recurring revenue. We have an aggressive plan to become a dominant player in the security integration and low voltage communication business on a national level utilizing both organic investment and selected strategic acquisitions."
Butch Roller, President of Suisun Operations, whose role was recently expanded to include sourcing and integrating acquisitions and product/market expansion opportunities, added that, "Prior to joining WPCS, Wally Wallace, our newly hired Sr. Vice President of Sales and Business Development and myself were instrumental in building the former MCS Fire & Security business, a super-regional security systems integration business that grew annual revenues from $10 million to $45 million a year, over a 5-year period with a CAGR of 35%. We are extremely confident in our team's ability to replicate that success at WPCS."
"Launching security integration in Texas makes perfect sense for WPCS, as both Butch and Wally are very knowledgeable of the Texas market and have already communicated with several key potential customer accounts and major access control and video vendors from past business relationships. We expect to commence operations in San Antonio in early 2016. Once established in Texas, we will then port these security services to our Suisun Operations in northern California, and ultimately, to other markets we are targeting," Giordano concluded.
 I like this expansion into Texas and the security market.  I think it fits with what the company's done in the past and what management knows.

Management and Restructuring:
One thing I do not like about this situation is inside ownership.  Most companies I invest in have heavy insider ownership but this one does not.  The board has options that total 1-2 percent of the company but that's it. The CEO's exercise price varies from $4.84 to $26.40 vs the current price of ~$1.50.

One thing I do like is new ownership that is willing to do what's necessary.  Take a look at the operations that have been closed, or sold, in the past few years.
  • WPCS - Lakewood
  • WPCS - Hartford
  • WPCS - Trenton
  • WPCS - Seattle
  • WPCS - Portland
  • WPCS - China
  • WPCS - Australia
  • BTX (this was some sort of bitcoin trading platform)
That left the Suisun City operations in CA as the only subsidiary.  What a bloodbath.  That must not have been easy but the company has been closing unprofitable divisions for years.  In Oct 2015 the company announced the restructuring has been completed.
WPCS International Incorporated (NASDAQWPCS), which specializes in contracting services for communications infrastructure, today issued a stockholder update following its September 29, 2015 Annual Stockholder Meeting, summarizing the Company's improved financial condition, as it transitions from completing a successful restructuring plan to implementing a value-enhancing growth strategy.  
In a prepared statement, Sebastian Giordano, Interim CEO of WPCS, said, "As we previously announced, the restructuring of WPCS, which commenced in August 2013 and was completed in July 2015, was not only highly successful, but now has the Company better-positioned for the future, as we chart a new, exciting course for the Company. In two years time, we executed a turnaround plan that resulted in significant improvements in our financial position, as we eradicated millions of dollars in expenses and liabilities by:
  • Dramatically reducing corporate overhead;
  • Closing and selling unprofitable and non-core businesses;
  • Eliminating all secured and unsecured notes; and,
  • Settling various liabilities for lower amounts.
"With the restructuring behind us, we started the new fiscal year by reporting net income from continuing operations for the first quarter. Though a modest amount, we strongly believe it is indicative of just how far we have come, especially when one considers that during the four consecutive fiscal years ending April 30, 2011 through April 30, 2015, the Company incurred cumulative net losses from continuing operations of more than $75 million.
"We have sufficient cash and adequate liquidity to fund our Company for the next twelve months. In fact, between the year-end April 30, 2015 and the first quarter ended July 31, 2015, we increased:
  • Working capital from a $1.3 million deficit to a $2.2 million surplus;
  • Cash and cash equivalents from $2.4 million to $5.5 million; and,
  • Equity from a $139 thousand deficit to a $3.3 million surplus.
"Present state notwithstanding, it is certainly not our intention to stand still. Armed with a profitable core business, our plan is to pursue both organic growth initiatives and acquisition opportunities as aggressively as we conquered the restructuring. A first step towards that end was our recent engagement of an investment-banking firm to work with management in identifying, targeting, and assessing various strategic opportunities.
"We are as confident today, about our go-forward goals, as we were back in August 2013 about our ability to execute the restructuring plan. We see this an exciting time for WPCS. With what we view as the most difficult and challenging part behind us, we look forward to the next phase of the Company's transition, the primary objective of which is to increase stockholder value.
"Finally, on behalf of the entire Company and the Board of Directors, we thank all of our stockholders for their continued long-term support of WPCS and, as always, we will continue to update you on our progress."
Sebastian Giordano joined the board in June 2013, became Interim CEO in Aug 2013, and immediately began the restructuring.  David Allen became CFO in Dec 2014.  Butch Roller "joined WPCS in October 2012 as President of its Suisun Operations and was responsible for leading the turning this struggling unit into a profitable business."   

At the end of Oct 2012 the company announced some management changes:
  • Expanded the role of Butch Roller, President - WPCS International - Suisun City, Inc. to include responsibility for sourcing and integrating acquisitions and product/market expansion opportunities, and transitioning from day-to-day management to supervision of contracting operations. 
  • Hired Walter Wallace as Senior Vice President of Sales and Business Development where he will be responsible for driving sales growth and be a key member of the mergers and acquisitions team. 
  • Promoted Rick Ruth to General Manager - WPCS International - Suisun City, Inc. where he will now be responsible for day-to-day management of the Suisun Operations.  Mr. Ruth joined WPCS in 2003 and has been a Senior Project Manager for one of WPCS's largest customers. 
Giordano added that, "After recently announcing the end of our restructuring, the Company subsequently reported a modest profit from continuing operations for the first quarter and expects that Q2 will further demonstrate continued improvement in our operating results. Now, we're aggressively launching the third quarter with a deeper operational management team keenly focused on profitably growing our business." 
These changes directly led to the expansion into Texas and the security market a couple weeks later.  

Recent Operations - Good and Bad News:
The 10Q filed in Sept 2016 notes "expected continuing operating profits from its Suisun operations for FY2016."  The company reported $84k income from continuing operations which isn't much but it's positive and that's the point. If they can stay on a profitable path then this will be a big winner.  In the same period last year they lost $2.6M in continuing operations.

Unfortunately the 10Q filed in Dec 2016 did not continue with positive income from continuing operations as they had hoped, instead showing a $2M loss vs a $350k loss the prior year.  $1.6M of this was "non-cash compensation expense related to the issuance of employee stock options" but still this is a quarterly loss from continuing operations.  I was expecting a continuing operations profit based on the prior 10Q.

One bright spot from the most recent 10Q is a backlog increase up to $14M from $13.1M last year. 

In April 2015 the company executed a 1-for-22 reverse split to drop share count from 19.5M to 0.9M. Fewer shares is good but being forced to do this by a sub-$1 stock price is not. 

Since the reverse split the company has steadily increased the number of shares outstanding by issuing shares to pay various liabilities such as preferred dividends.  The outstanding share count is now 2.6M.  Still a small share count but it's growing and there are a lot of convertible preferred shares and options out there.  The convertible preferred have contingencies such that they cannot be converted to give someone more than 9.9% of the outstanding common.

In the most recent 10Q it was noted that the company gave out 2.6M non-qualified options with a term of 10 years and an exercise price of $1.32.  This is a ton of options for sure.  Perhaps they're using the options as a way to retain employees while keeping a low cash salary cost.  Perhaps they're hoping the options are exercised so they can raise some cash.  Either way, for the options to be worth much share price has to increase which is not a bad thing. 

They have $2.5M in cash as of the end of the last quarter, increasing over last Q by $150k.  They were able to do this by selling the China operations and issuing the H-1 preferred, otherwise they'd be down to no cash. 

Recent contract announcements have been good.  In Sept they announced $3M in new contracts for July and August with $1.4M being a new project.  In Nov they announced $4.7M in new contracts during the 2nd quarter.  In Dec they announced $1.9M in new contracts during November: "This is a testament to our Suisun Operations leadership. Just thirty days ago, we implemented an expansion of our Suisun management team, now under the supervision of Butch Roller and the day-to-day management of Rick Ruth. They responded, in what was clearly a transitional month, by generating a 72.7% increase in contracts signed as compared to November 2014."

A Change in Control Coming?:
Who knows if it'll happen but it's certainly possible.  The optimist may say the company is looking to sell itself while the pessimist may say the CEO is afraid of being proxied out. 

In Aug 2015 the company hired an investment banking firm to "to pursue all viable options to profitably build WPCS, both organically and strategically, the primary goal of which is to deliver increased shareholder value."

In Sept 2015 the company entered into agreements with the CEO and CFO whereas they would get paid for a change in control. 

The most recent 10Q noted 726k options given out which vest "upon either the Company completing a change in control merger by September 1, 2016 or achieving $30 million in revenue for the fiscal year May 1, 2015 to April 30, 2016."  The same 10Q shows $8.3M in last 6 months revenue so it'll take quite a bit of growth, or a change in control, to vest these. 

Preferred Stock, Warrants, Options:
The company has been issuing convertible preferred stock and common stock warrants to pay bills.  It's a good thing in that they are doing what is necessary to keep the company alive.  It's a bad thing because the share count will rise as the preferred gets converted to common.  They've also been paying some preferred dividends with common.  One good thing about converting preferred to common is the cash it generates.

From the most recent 10Q:

This investment requires some faith and taking a chance.  Do you think the company can generate continuing profits from what they have left or will they endlessly dilute shareholders until bankruptcy calls? 

We have a company that has undergone major changes over the past few years.  Share price has taken a nose dive and only recently came off all time lows.  The company has focused and shed all the fat they could by doing away with 8 of their 9 divisions.  They are now beginning to expand with a new leadership team and structure.  Recent contract activity at their sole remaining division, Suisun,  has been positive and they start new operations in Texas in the next few months.  They have some cash and no debt.  Let's see how it goes...

-- Dan
Disclosure: Long WPCS

1 comment:

  1. Nice PR this morning, WPCS "today announced that it secured $1,985,000 in new contracts in the month of December 2015 as compared to $765,000 during the same month last year...159% increase"