QIS Update #37 2014 - December 31st 2014
Included in this update:
- Virtutone Networks files its third quarter financial statements
We’d like to wish everyone a very Happy New Year and all the best in 2015!
2014 was an interesting year for small-cap investors with such a promising start and such a disastrous finish. But they never said that small-cap investing was easy nor is it for the faint of heart. We look forward to 2015 with much optimism as we are heavily invested in some very promising companies.
Much like the prevalent market sentiment in 2014, the online QIS Trading Summary started very strong and ended the year with a cumulative gain of 73.82% over 3 years but with a more modest gain of 6.6% during 2014. We will continue to update this portfolio online during 2015.
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Virtutone Networks Inc. (VFX:TSX-V)
Current Price: $0.105 (coverage commenced Sep. 9/11 - $0.10)
Virtutone Networks Inc. has announced its financial results for the three and nine -month period ended October 31, 2014.
Virtutone net revenues reached $39,601,691 for the third quarter of 2014, an increase of $27,371,111 or 224 % compared to the same period a year earlier, and an decrease of $5,451,563 or 12% compared to the second quarter of 2014.
The growth in revenues year over year is the result of focusing on the wholesale business and the benefits associated with acquiring a strong customer base in late 2013. The revenue decrease of Q3 to Q2, 2014 mainly stems from Virtutone’s objective to increase its insured receivables, which, while limiting the Company’s liability, resulted in a period of adjustment. The Company, as a consequence of this objective, had to re-asses existing customer credit limits which, in some cases, reduced existing commercial volumes. The Company, also during this time, expanded its existing customer base to include a greater number of insurable customers.
"I continue to be pleased with the progress the company made during the year, which has resulted in significant growth in our revenue, gross profit, and income from continuing operations" says Mr. Bill Woods, Chief Financial Officer. With the Company continuing to manage it costs and look for ways to improve the bottom line, the profit margins for the month of November have increased to 4.56%.
As at October 31, 2014 there were 42,365,000 common shares outstanding, 3,560,000 options to purchase common shares, 8,972,749 warrants and 1,042,844 broker warrants.
|LATEST FINANCIAL RESULTS – (in 000s)|
|3 Months Ended Oct. 31||9 Months Ended Oct. 31|
|Cost of Sales||38,244||11,488||107,294||22,928|
(as at October 31, 2014)
|Current Assets||$ 33,211,628|
|Finance Lease Obligations||38,031|
Key Portions of MD&A
Negotiations surrounding the previously announced line of credit, press released July 21, 2014, were subsequently terminated. The Company continues to seek a long term financial partner with the flexibility to support the Company’s commercial freedom and to allow the Company to deploy greater capital benefits to its shareholders.
Subsequent to October 31, 2014 the Company’s largest insured customer has been delinquent in its payments for outstanding invoices from the month of November, 2014. Accordingly, a significant amount of receivables for the Company remain uncollected. This delinquency has significantly impacted the Company’s cash flow and has resulted in the Company’s indebtedness to some vendors. The Company is making all efforts to resolve this delinquency and the Company’s resulting indebtedness.
QIS Capital: While initially pleased with the positive financial results, investors obviously grabbed hold of the negative comments posted in the MD&A, which we have included above. It should be noted that the delinquent customer is part of a massive company and management feels very confident that it will collect in full. Worst case scenario is that Virtutone has to collect on the receivable through its EDC insurance but VFX has been told that everything is in order and it is only an unexpected delay. Due to this fact, we expect to see a significant reduction in revenues for December and the early part of January before returning to normalized revenues in February.
On a positive note, margins in November were much stronger at 4.56%. If this margin holds throughout Q4, then revenues would have to fall below $30 million before the quarterly gross margin would drop below that achieved in Q3.
As for the LOC, this is quite frustrating as we have been told many times that this was a done deal. In our latest discussion with management, it sounds like the Board decided to go a different route in November due to many of the restrictive covenants of the proposed LOC.
At the end of the day it appears that management has lost the confidence of the market and will need to continue to justify the business with financial results. Virtutone should end its fiscal year (Jan31) with earnings over $0.03 per share so the stock is now trading at only 3 times. Last year, the company announced its year-end financials at the end of April so we’ve got a long time before the next financials.
Disclaimer: This article is for informational purposes only. The information contained within this article should not be construed as offering investment advice. Those seeking direct investment advice should consult a qualified, registered, investment professional. BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 6 Mcf: 1bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. The company profiled assumes no liability for the information presented. This is not a direct or implied solicitation to buy or sell securities. Readers are advised to conduct their own due diligence prior to considering buying or selling any stock. The author(s) owns directly or indirectly 567,000 shares and 212,500 warrants of Virtutone Networks Inc. QIS Capital may have a financial relationship with these companies and may trade in the stocks mentioned. No stock exchange has approved or disapproved of the information contained herein. Copyright © 2003 - 2015 QIS Capital Corporation.