Sunday, April 28, 2019

QDLC's Potential has Increased

I last talked about QDLC almost two years ago when a group of shareholder activists waged a proxy battle in hope of selling off the company.  When I first wrote about this one 3 1/2 years ago they were dark and hadn't communicated with shareholders in years.  The stock has risen from $0.20 to $1.50 then drifted back to the $0.30s.  Never a dull moment in the QDLC saga and that's not changing any time soon.

Three months ago in January QDLC won an $8M judgement in court.  We have a $3.9M market cap.  You do the math.

Let's have an update on QDLC.  For the backstory you can read my prior posts on QDLC here.

$8M Court Judgement
I'm sure you want to hear about this judgement for twice the market cap (special thanks to the blog reader who told me about this).  Any time you hear about a court win and monetary judgement you have to ask yourself three questions: is it real, is it final, and is it collectible.  As you know I'm no lawyer so you need to form your own opinions.  The judgement is most certainly real and you can see for yourself here:
Wednesday, January 02, 2019
JUDGMENT IN A CIVIL ACTION: The Court has orders that the plaintiff Quadlogic Controls Corporation recover from the defendant Pounce Electronics S.A. de C.V. d/b/a Pounce Consulting the amount of Seven Million Nine Hundred Seventy Five Thousand Seven Hundred Seventy Three dollars ($7,975,773.00), which includes prejudgment interest at the rate of 9%, along with costs. This action was decided by Judge Edgardo Ramos on a motion for Default Judgment pursuant to Fed. R. Civ. P. 55(b)(2). (Signed by Judge Edgardo Ramos on 1/2/2019) (mro)
It was mentioned in the last company annual filed Aug 2018:
On January 16, 2018, the Company filed lawsuits against its Mexican licensee and its former employee alleging among other things, breach of contract, failure to pay royalties, and breach of fiduciary duty and seeking injunctive relief, payment of royalties in the amount of $7,360,000, and full access to Energy Guard source code. The lawsuits are in the earlystages and no assurances of recovery or the amount can be made.
This stems from the large orders mentioned in Apr 2017 when the company put out their first press release in years.  The company had started some new business in Mexico through Pounce Consulting and somehow that went bad.

Next question is will there be an appeal.  There's been no activity in the court for almost four months now.  I'd expect an appeal to come by now but who knows.  I'm no expert in these things.

Is the $8M collectible?  It's clear the court ordered the payment but Pounce is in Mexico.  How would Pounce be forced to pay up?  Would Pounce voluntarily pay up?  I think there's little chance we see an $8M check coming in the mail.  Pounce did have lawyers fighting on their behalf for a year so they must care at least a little bit.  Even if they agreed to a settlement of half that'd be for all of QDLC's market cap!  They could settle for a quarter of the judgement and I'd be happy.  Perhaps QDLC and Pounce will continue working together and QDLC could get payment in the way of better deal terms.  I don't know what'll happen and in my mind this lawsuit is sort of icing on the cake.  If money comes in then great but I wouldn't count on it.

I asked the company how collectible this lawsuit is but they side stepped the question:
Our outside accountants (BDO) are scheduled to have the fiscal 2019 complete by the end of May/early June (which will be 2 months better than last year) so we are doing better in that regard. Upon completion, we should be able to provide an update to all shareholders on the Company’s status. I can tell you that the Board continues to explore ways to enhance shareholder value but it is a process.
Chart
One reason I love charts are the stories they tell.  The 5 and 10 year are below.  You can see the rise back in 2012 when they filed reports for the first time in a decade followed by the drift downward amidst the darkness.   The rise in 2017 came as the company put out press releases and filed financials for the first time since 2012.  That giant spike to $1.75 in spring 2017 is from an overly optimistic stock newsletter and I remember watching it.  I read the post and watched the volume and I'm still kicking myself for not selling into it.  A missed opportunity.  You can see the hope didn't translate to reality and the stock has drifted back down towards long term support.  Now we sit flat in the 0.30s for almost a year.



Activists
In 2017 a group of shareholders, including the CEO and a former Director, were going after the company.  It's a crazy story and I encourage you to read about it in my last post.  They put out press releases and proxies and wanted to get to a vote.  I talked to the guy organizing it, Peter Fagan, a few times.  The CEO had been pushed aside and wanted out.  Fagan and other large shareholders wanted out.  The stock has done nothing forever so they just wanted to sell and move on.  There was a shareholder meeting scheduled with voting.  In the end neither side was sure they would win because it was too close to call so they went to the negotiating table.  In Aug 2017 they put out a press release announcing the agreement.  Both sides had to compromise.  Fagan and another in the Concerned Shareholder Group got board seats and the board size increased to 5.  Unfortunately the activists didn't get a majority but at least there's representation.  

The craziness continues with the former CEO, Sayre Swarztrauber, commenting all over the Ihub message board to defend his name.  That I've never seen before.  I guess the company is suing him for something to do with Pounce.

Fagan's goal was to sell off the company.  He said as much in his letters to shareholders and told me the same. He thought it might make sense to break apart the company into chunks.  You can think of the company as two business units.  
  • Billing.  This side is a predictable recurring revenue source. Once meters are installed QDLC provides this service where they read them and send out individual bills to all tenants in a building. QDLC is the biggest provider in NYC.  I think this could be worth on the order of $1 a share and this one is probably the most attractive to a buyer
  • Metering. This side is design, development, and sales of power meters. Brains behind it all was the old CEO Sayre but he has been out of the picture since mid-2017 so now I think the company re-badges a unit.  QDLC’s old advantage was Power Line Communication (PLC) which is a way of the meters communicating over their normal power lines back to a data collection unit in the basement. So with no additional wiring QDLC could read all the meters remotely by connecting to the basement data collection unit once a month. This used to be very valuable but is not so valuable any more, especially in new buildings which are the majority of meter sales, because new buildings are getting wired with so many things nowadays that it is not much of an extra cost to wire up communication lines to all the meters. Since PLC is no longer so valuable the company doesn’t care that Sayre is walking away.  Now that Sayre is out of the picture the metering business is really a customer base and sales team.
    • Additionally this metering can be thought of as the US/Canada side and then the Middle/South America side. Potentially it could be split up like that.  The Middle/South America side is what the existing board really wanted to focus on because of the Mexico business but then there's been issues with Pounce so I'm not sure where it stands.
As always things are taking longer than expected.  Fagan has had success in increasing shareholder communication.  It's not completely on time but the press releases and numbers have been coming.  He says we'll have the next annual in a month or two.  But the company sale remains a goal to be marched toward.  Perhaps the completion of the Mexico lawsuit will allow them to move forward.

Valuation and the Future
Here are the most recent numbers:
  • $13.8M revenue in 2018 vs $13.4M the year prior
  • net income very slight positive but basically nothing
  • BV nothing
  • shares common 11.4M
  • no preferred or warrants
Those numbers should be worth a dollar or more per share.  On top of that we have activists on the board targeting a sale.  We have a litigation settlement for $0.70 per share.  Latest stock price is $0.34 giving a market cap of $3.9M.  I don't see how this company is really worth only $0.34.

The story on Quadlogic continues to be, "something will happen some day..."

--Dan
disclosure: long QDLC

13 comments:

  1. How did you get the financial statements? The company seems to be dark.

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  2. ok now I see the financials at OTC markets. But the company is overindebted as per end of Feb 2018 (equity is minus 66k). Or have I missed something? So there is distress. Recent earnings and cash flows are poor. The court judgment helps somewhat if they really can collect the money. However, I am not sure if this stock is really cheap.

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  3. Dan, how are you getting a book value # of $5M? Per their (unaudited) 8/31/18 financials on OTC Markets, the company's book value is slightly negative (-$125,000).

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    1. I'm so sorry. thanks for catching that. I was moving too quickly. I'll fix that in the article

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    2. doesn't change my opinion on the stock

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  4. I think the quality of this stock is low. Cero earnings, negative cash flow, negative equity. In addition, cash to total assets is very low so this stock is highly distressed. The stock has also a very high bid/ask spread (more than 30%)!
    Only the court judgment is interesting if they really get any money. I think there are better stocks on the market.

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  5. A "quality" nano stock is e.g. Nix Inc (4243). It trades with a p/e of 5.5, p/s of 0.4, P/b of 0.5, dividend yield of 2.8. In addition, it is at a 5y low, outstanding shares are only 2.3 Mio. Total debts to total assets are low. I would say this is a really cheap, quality stock.
    This stock is from Japan, but I dont think it matters...

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    Replies
    1. Michu, do you know where I can find financial statements for this company?

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    2. Thanks Michu. I haven't heard of that one. All my stocks are listed in the US. Have just never looked outside the states.

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    3. Try this site for Japanese financials:
      www.kaijinet.com/jpexpress/

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  6. The language barrier can be difficult. Financial statements can be downloaded from the Japan Stock Exchange. But since the company is very small, they are in Japanese and you would have to translate them e.g. with Google Translate. Simple financial data (balance sheet, income statement etc.) can be found on many webpages e.g. at www.investing.com

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  7. I currently also like the nano stock Select Sands (SNS). This "falling knife" was trading at 1.75 not so long ago and is now at 0.085. The volatility seems interesting. MC is 8 Mio, debts are low, P/S is at 0.26, p/b at 0.25,p/cf less than 2.

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