Thursday, October 5, 2017

VLXC: Patience and the Unknown

There's a bit of gambling in my line of penny stock investing.  I know that's sacrilege to all the intellectuals out there reading 500 pages a day and I know Benjamin Graham would not approve.  Whatever.  Sometimes the upside vs downside is compelling enough to take the plunge.

Veltex Corp (VLXC) is one of my gambles.  There is no revenue or operations.    They issue shares to pay bills.  Here is the investment thesis in one sentence: VLXC has been awarded $153M in damages from a lawsuit and has a market cap of $9M.

First my warning.  I am no expert on anything law related.  I'm only a guy who has read a few filings.

The financial statements show no debt.  They have been selling about $100k worth of stock each year to pay fees but that went up to $500k last year for some reason.  They have 68M shares outstanding which grows as necessary to stay alive.  The company has about $3M in NOLs.

The Veltex website has a good history on the litigation and news.  I'll give you the condensed version.  In Aug 2008 a lawsuit was filed in Utah alleging the CEO of VLXC, along with others, illegally transferred 120M shares of Veltex without shareholder approval.  VLXC was a clothing or textile company at the time.  In Mar 2012 final judgement was issued by the Utah court granting VLXC shareholders $103M plus interest.  The defendants are Javeed Azziz Matin, Mazhar Haque, Wilshire Equity, Inc. aka Wilshire Equities, Inc., Tanzila Sultana, Michael J. Moore, Moore & Associates, Chartered, Veltex Apparel, Inc., Veltex Industries, Inc. and Veltex USA, Inc.  The final judgement shows 3 separate claims all saying the defendants have to pay back the $100M but in each claim there are separate groupings of these defendants.  I don't know how the money would be split up between defendants.

Fast forward to today and the company is still trying to get the money.  Interest is piling up and the latest press release shows the total is up to $153M.  The same PR announced the appointment of a new CEO.  The company is fighting legal battles in multiple states as well as federal court.  This has been going on for almost a decade now and who knows how much longer it'll continue.

Of course the question is will VLXC retrieve any money and when will that be.  I don't know the answers but the stock price shows the market thinks VLXC's chances are slim and/or the timeframe is long.  The company had this to say in the most recent annual report: "Management is unable to address with reasonable certainty the collectibility of these legal judgements, but will continue to pursue them within its legal rights" and this to say after the most recent annual meeting "Veltex has continuously sought the advice of foremost legal and accounting firms to enforce, protect and expand upon these potential valuable assets."

There have been some positive developments.  First they are up to date with filings through OTC Markets so they are not hiding in the dark.  In Nov 2012 one of the defendants filed for bankruptcy and the company was able to collect money through the courts (only $57k but still).  In Oct 2014 they announced the "corporation has received notice from the Depository Trust Company ("DTCC") that effective October 17, 2014 DTCC has reinstated all services for Veltex Corporation ("Veltex") common shares currently listed on the OTC market."  In Jan 2015 the company revised the interest rate for litigation receivables, up from $2M to $25M.  The latest annual notes the company has "settled, under strict confidentiality agreements, with numerous defendants" and "The Company has begun the process of collection in Los Angeles County, California." In July 2017 VLXC announced a court win in Nevada, "The debtor will pay $300,000 and the estate may proceed to enforce the collection on a $2,000,000 outstanding contract currently in place"

The company is working on the situation but these things take time.  In Sept 2016 they announced a partnership with, and investment by, Batuta Capital Advisors "to assist the Company in exploring strategic alternatives." Some quotes:
These alternatives will focus on building upon Veltex's current settlements, property liens, federal judgments, state judgments, and currently booked net operating loss conversions, which could include selling, partnering, or raising capital to operate as a stand-alone firm.

Moreover, Mr. Zyngier has made a substantial restricted equity investment in Veltex. Mr. Zyngier commented "Veltex completely fits our model for investment – an undervalued equity with sizable complex legal structures and with meaningful opportunities to growth.

Following a detailed evaluation over the past several months, we have determined that it is prudent to undertake a review of our strategic options to determine which alternative or alternatives, including our stand-alone plans, are in fact the best way to maximize shareholder value.

The Board of Directors for Veltex has determined that it is in the best interest of its shareholders to consider itself a possible acquisition target, at a minimum, to a strategic company that possesses the necessary resources to invest in and capitalize on the significant potential asset value of Veltex's current booked NOL carry forwards and value in the current legal judgments of approximately $150 million dollars.
No stock analysis is complete without a chart so here you go. Pretty flat and boring, just the way I like it.  You can see shareholders selling out with the lawsuits in 2008.

The 5 year chart shows support around $0.10.  And you can see a jump when the "strategic alternatives" were announced a year ago.

Conclusion:
I look at this one purely as upside versus downside with patience.  I think the share price is low for two reasons: value is unknown and too much patience is required to find out.  I am willing to wait.  Worst that can happen is I lose my $0.135.  Best that can happen is we get the full $153M = $2.25 per share.  I'll take that bet

--Dan
disclosure: long VLXC

26 comments:

  1. Very nice summary. I agree with your vision (or assumptions) but time is of the essence and management seems (to say the least) slow in activating whatever strategy ... assuming they realy have one.

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  2. More than interesting I would say Dan. After looking into this my question is could that company have a tax asset on the money they don't collect? If they do this has massive hidden value here. Great article on a deeply hidden stock find here. Nice job!

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    1. Actually once you make the efforts to collect these become theft loss and can be utilize for 20 years

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  3. How did you find this one? The source of the idea is often related to the ultimate value, in my experience. i.e. referral by a successful investor=better chance of a good result, etc.

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    1. A friend of mine, who is a successful investor, told me about this stock.

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    2. But to you I'm just a random guy on the internet with some friend so you should do your own research

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  4. I would say that the underlying logic of an idea determines its success, not who gave it to you.

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  5. Agree. Look at the tax NOL if uncollected of $160,000,000 with about $3,000,000 already on the books.

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  6. Personally I bought in this in the mid 90's and enjoyed trading in and out till I had 50,000 or so almost free shares. Then the sh.. hit the fan and I mentally wrote these off (they however stayed in my prtfolio). Then someone decided not to accept being screw.. and had the means to go after the crooks who stole from us. Your story summarize the following event very well (thanks again). When the situation became alive again, I did buy 50,000 more shares at + or less 11 cents ... just in case. I now sit on 100,000 shares at s slighly higher cost than 5 pennies, in a stock I decided to gamble on (not invest bu play) and I plan to sit on them till the management decides time has come to somehow materialize our asset somehow. At current PPS I definitely think this is a GOOD BET (high risk however) for one who can get his hands on shares. The proble is that those having shares like I are not very much interested in selling out. BOLTA.

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  7. This is a VERY interesting corporation. The management is aggressive and I believe the tax area and value within could payoff in a major way let alone collection that appears to be going well in Nevada for a start.

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  8. Red flag in that the defendants subject to the judgement were defaulted. When a defendant doesn't respond to a lawsuit it is often because they are broke or are otherwise judgement proof. The SEC complaint against Matin and Wilshire states that they made all of $6.5M off of this pump and dump scheme. So unless Matin had other sources of wealth it is unlikely that he is sitting on anywhere close to $150M. Wilshire Equity was created by Matin solely for the purpose of receiving the Veltex shares and selling them so no assets there. I am skeptical that there is much to be recovered beyond the immaterial settlements that have already been secured. The NOL might be of some value to an acquirer though.

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    1. Sometime damages can be paid by corporation's insurers (lawyers, accountants, ...). Those generally have a lot more ressources to go after. Let's hope the management has included them in whatever legal matters they initiated ???

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  9. Those defendants that defaulted are still on the hook. There are 22 defendants in the legal matter. Some settled and liens are filed on property, from what I can find. The Nevada litigation appears to have $300,000 from one and a $2,000,000 contact against other individuals and companies just there. There is enforcement in several states and Canada. What they don't collect is a NOL asset. The more you dig the better this looks. Great find Dan.

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  10. Thanks for the comments everyone. I was not even thinking about uncollected funds being a NOL asset. That's great

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  11. I love these situations. Even if the odds are not in your favor sometimes the upside can be so high that it's worth a speculation. I've kind of set a random number of at least 10% likelihood of success for these lotto ticket situations (adjust higher for lower expected gain).

    These situations are way better if they are thrown in for free in a company that has operations or assets worth the price of admission alone.

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  12. Veltex Corporation has an asset when and if the company "writes down" those 22 judgements. Also appears they have other judgements in California. AND property liens AND settlements. These have state tax implications also...so both Federal and State (any state but especially California) possible. Not a tax lawyer here but this seems most promising looking forward. Interesting to say the least here. A little bit complex but interesting.

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  13. VLXC is or should be a "Seeking Alpha " review and blog Dan. You should look into that. Wonderful work by you on this corporation. Will you be updating as time passes?

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    1. Thank you. I only write here on my blog.

      As with all my stocks, if there are notable developments I may write a blog post. It all depends what happens with the stock and what else I have going on.

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    2. I have written on SA in the past before I had a blog. Now I prefer to keep it all here where I own and control it.

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  14. You might like SORT, they create sorting and printing machines for mostly financial companies. $1.2m in EBIT from ink sales which is steadily growing, and a few $100k from sale of their machines (which has pretty big swings). I managed to get some shares for $0.2 (or at less than 4x EBIT).

    Illiquid as hell though, so patience is key :) .

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  15. I really believe that VLXC may have a major asset with this NOL (that is on their books) and the NOL that may be coming along with cash and property. These are BIG numbers.

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  16. If you like this one for the NOLS check out Affymax. $1 billion in NOLS and a $1.17 million market cap.

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  17. Can a company like VLXC sue their own insurance company under these circumstances? The good guys didn't perpetrate the fraud.

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  18. The company cannot sue its own insurances but it can sue those covering accountants, lawyers or other Professional association insure to protect their members. However I Wonder if these insurers covers amounts of penalties resulting from criminal acts if criminal acts can be proven '''

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  19. Not entirely unlike ABCP, now undergoing its second major round of litigation (regarding the investment it made with the money from its Winstar litigation, which was a successful ~20-year affair).

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