Monday, July 16, 2018

VII Becomes VCON

On June 19, Vicon Industries closed at $0.36 and it had been pretty flat around $0.40 for over a year.  The next day the company put out a press release announcing failure to comply with NYSE listing requirements and on July 12 the company changed symbols from VII to VCON as they moved from the NYSE to the OTCQB stock exchange.  

With no other news the stock has dropped all the way to $0.16, a loss of 56%.  I want you to ask yourself if a stock exchange name is worth half the company.

Think back to Buffett's purchase of American Express following the salad oil scandal in 1963.  You know the story.  American Express went through a major public perception change and the stock was cut in half.  But company earnings value was unchanged so Buffett bought in and now it's known as one of the things that made Buffett into Buffett.  If my memory was better I'd quote you the annual letters where he talks about it.  It turns out the scandal did not materially change the company so the stock eventually came back and Buffett made a ton of money.

While you're at it, why don't you go re-read Greenblatt's classic You Can be a Stock Market Genius and think about this situation.  He talks about finding major change, inflection points, misdirection, forced selling.  Buy the spinoff if those who held the parent are likely to sell.  Buy the company emerging from bankruptcy if those who held are not interested in, or equipped for, the new entity.  Now apply that thinking to something as business agnostic as a stock exchange name change.

Here we have a company that has undergone ZERO change yet the stock has taken a nose dive.  Check the chart:


Before you get too excited about this amazing idea you need to look at the other side of the coin.  Share count.  Here is common shares outstanding over the past five quarters: 9.3M - 9.5M - 9.0M - 14.2M - 17.6M.  Ouch.  You see, I am once again telling you the story of a tiny company struggling to survive.  Yes we have a Greenblatt style line in the sand but this is not so different from my purchases of HYDI, GIGA, MRCR, FORD, EKCS, SOFT, and all the rest of them.  Unfortunately for us shareholders VCON had to dilute to keep the lights on.  

In the chart above, the latest 10Q filed on May 15 showed the world 17.6M shares outstanding.  Of course it was not a surprise as the company had done their rights offering and gone through financings.  As you can see below it did not move the share price much.  The stock had been sitting around the $0.40 support area for a year:


The stock only got chopped in half once they moved into the dreaded OTC world.  

With all the fun drama out of the way let's talk about the company and a current valuation, forgetting how we got here.  The company makes software and systems for video surveillance.  It's an exciting and expanding field.  From the latest 10k:
Vicon Industries, Inc. (the "Company"), incorporated in 1967, develops video management software and also designs and markets a wide range of video system components, comprised principally of cameras, network video servers/recorders, encoders and mass storage units, used in security, surveillance, safety and control applications by a broad group of end users. A video system is typically a private (or hybrid public/private) network that can transmit and receive video, audio and data signals in accordance with the operational needs of the user. The Company's primary business focus is the design of network video systems that it produces and sells worldwide, primarily to authorized dealers, system integrators, government entities and security products distributors.

The Company operates within the electronic protection segment of the security industry. The U.S. security industry consists of thousands of individuals and businesses (exclusive of public sector law enforcement) that provide products and services for the protection and monitoring of people, property and information. The security industry includes fire and detection systems, access control, video surveillance, asset protection, guard services and equipment, locks, safes, armored vehicles, perimeter protection, private investigations, biometric systems, software and network security, among others. The Company’s products are typically used for crime deterrence, visual documentation, observation of inaccessible or hazardous areas, enhancing safety, mitigating liability, obtaining cost savings (such as lower insurance premiums), accumulating command and control data, managing control systems and improving the efficiency and effectiveness of personnel. The Company’s products are used in, among others, office buildings, manufacturing plants, apartment complexes, retail stores, government facilities, airports, highways, transportation operations, prisons, casinos, hotels, sports arenas, health care facilities and financial institutions.
Stats from the latest 10Q:
  • revenue 7.3M vs 6.0
    • TTM rev $29.1M
  • earnings -$1.45M vs -1.90
    • TTM earnings -$6.6M
  • shares common 17.55M
  • BV $2.8M vs $2.4
  • long term debt ~7M
  • market cap $2.85M
  • no preferred
  • 1.5M warrants to buy common
    • exercisable at $0.40 so the stock would have to double for these to be worthwhile 
My standard valuation method is to say a stock is worth the higher of 1x revenue, 10x earnings, or 1x book then I add in all the extra stuff.  You financial types with giant spreadsheets can start laughing now.  I keep it simple, fish in my pond, and act with patience.  

Right now VCON is trading at 10% of sales.  That is cheap.  Sure they are losing money and trading at book.  Gross margin is around 40%.  The field is exciting and expanding and I think VCON's future will be brighter than $0.16.  I'll go with value of a dollar or more.  

A few months ago CETX bought 46% of VII/VCON from NIL Funding Corporation for somewhere around $0.35.  I say "around" because CETX also got those 1.5M options I mentioned earlier so it depends how you value those.  From the form 4:
The 7,284,824 shares of VII common stock together with warrants to purchase 1,500,000 shares of VII common stock for $0.40 per share were transferred to CETX in consideration for 1,012,625 shares of CETX common stock. In determining the number shares of CETX common stock received, the parties multiplied $0.40 by the number of VII shares transferred (7,284,824) and divided the product by the five-day weighted average price of the CETX common stock for the five business days immediately preceding March 23, 2018. The price (value) received for the VII common stock disposed of has not been calculated but was less than $0.40 per share. The price (value) received for the warrants to acquire VII common stock has not been separately calculated but it will reduce the value per share received for the VII common stock sold.
Before talking about the dismal risks let's finish on VCON's change.  This is a tiny company struggling to survive so in the end it's a binary question.  Will they make it?  They serve a growing industry and have been at it for 50 years.  They know what they're doing.  The most recent quarterly showed 21% rev growth YOY.  They have changed majority ownership and just three days ago the CEO announced a restructuring plan:
The Company is taking several steps including reducing overhead expenses, consolidating operations, and restructuring personnel to put the company on a path toward profitability over the next several quarters. 
We believe that Vicon has a bright future and with the changes we are making the company will be more competitive and valuable over the long term. Our immediate goal is to get the company to a cashflow positive situation and we hope to accomplish this by the end of the next fiscal year.
You already know the risk because you feel it in your gut.  Perhaps the company continues to lose money.  Maybe they have to dilute to raise cash and next year we have double the share count once again.  Maybe CETX gets fed up and sells out on the open market, pushing the stock to nothing.  Maybe bankruptcy comes knocking at the door...

But what if the restructuring works.  What if CETX made the right decision and a new product takes off.  What if they return to profitability.  What if CETX decides to buy out the rest.  Do you think the security market is shrinking or growing?  This doesn't look like the website of a dying $3M company to me...


--Dan
disclosure: long VCON, CETX

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