Hi nanocap,
You make a number of good points.
I have not had the opportunity to listen to any conference calls, and as you point out perhaps I should (I'm a very small individual investor, dunno if I'd be able to though). I have also not spoken to company management, though I was on the verge of doing so at one time; perhaps I should reconsider my reluctance and go ahead and call them. You are certainly correct in identifying these limitations of my research.
Here's something though: As for the financial stability of the Company, cash flow is positive, sales are increasing<snip>
2Q99 sales were $7,012K, 3Q99 sales were $6,697K. Licence sales (as opposed to "Services") also shrank a bit from Q2 to Q3 (I mention this because I wanted to be sure there wasn't a story behind the apparent small sequential sales decline).
Cash flow during the third quarter. Well "cash flow" means different things to different people (there really are many different legitimate ways to look at things, depending on what you judge important and what factor you are interested in). On the face of it (subtracting 2Q99 6mo cashflow from operations of -1,125K from 3Q99 9mo. cashflow of -1,888K) they had negative cashflow from operations during the third quarter of $763K. This of course includes changes in working capital, some of which are discretionary items (and simply reflect management's capital allocation choices), so it is not necessarily indicative of the true "operating cashflow characteristics" of the business.
Another "cashflow" number is "EBITDA". "EBITDA" is frequently the resort of the scoundrel ;-), one must be cautious (IMHO) to always hold one's hand over one's wallet when someone starts talking EBITDA... ;-)
Be that as it may, 3Q EBITDA is $66K (earnings) + ~$50K (my best estimate of interest on $2,400K bank borrowings) + $718K (depreciation and amortization) + $804K (Vertex note interest and write-off) = $1,638K.
If you want a "positive" number to look at, that is probably the most "positive" one I can generate. It does ignore certain realities though, and I wouldn't trust anyone who just threw some EBITDA numbers at me without doing some serious justifying as to how they related to reality.
I'm always suspicious of EBITDA, so let me take another tack: If I take their 3Q99 "Income from operations" of $842K, add back in $116K of goodwill amortization, take out about $60K (my best estimate of the quarterly interest on their $2400K bank debt) plus another $210K (the quarterly amount of payments due on their $1510K term loan), and I get a "sort-of free cash flow, neglecting capex" of $658K.
And neglecting capex they sure are. They only spent $28K in the 9 mos of 1999 so far, and the footnotes in that 10-Q states that they intend to continue this: "At September 30, 1999, our commitments for capital expenditures were not material". By my guesstimate they probably should be spending about $1M per year in computer hardware and software capex to stay current (that's $250K/quarter). Their Depreciation and Amortization, excluding goodwill amortization is about double that, nearly $2M per year - so I think it is fair to say that they should probably be spending $250K-$500K per quarter in capex to simply keep up with depreciation.
So my best guess is that they most recent quarter indicates a quarterly free cash flow from operations somewhere between $160K and $410K.
If they really, truly are making these sort of numbers, then it might no longer be a bankruptcy candidate as I originally thought, though at today's prices it would be seriously expensive. Even if they make $600K/quarter in free cash flow ($2.4M per year), their stock price does seem quite dear. 10X cash flow (a very, very generous multiple to pay) would value them at $24M, or about two dollars per share. Another justification of this is that $2.4M in FCF per year would indicate net profit margins of about 10%. a $24M price would be about a 1.0 PSR.
There you go nanocap, a concession from me! I might be conceding that the glass is indeed half-full! Perhaps (subject to confirmation by their 10-K) Versant is not a bankruptcy candidate after all, perhaps they are just overpriced (given the cash flow numbers I've been able to guesstimate.
If you disagree with my "two dollars per share, max" estimate of a fair value for the company, could you suggest and justify another value?
Best regards,
- Daniel |
