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Sangoma Drops Like A Rock

January 18, 2013 | About:
Barel Karsan

Barel Karsan

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As the market advances, it becomes more difficult to find value. Individual stocks are rising, offering investors opportunities to cash out. One stock bucking this trend is Sangoma (STC), a profitable net-net which has lost one third of its value since November.

Trading for $9 million, Sangoma has current assets of $13 million (including $4.5 million in cash) versus liabilities of under $2 million. At the same time, the company has earned about $600 thousand in the last 12 months.

There is no shortage of information about what Sangoma is up to. Management issues a number of press releases touting the company's latest products, awards and business "wins". It is very clear from the company's filings that the intent is to grow by adding more products to the company's portfolio; expenses have been ramped up to meet this goal.

This can be a good thing. If some of the company's new products take off, the company could see sales rise without a commensurate increase in costs (as the company is already incurring increased costs associated with the new products). But at the same time, there is a risk of failure here that is more than meets the eye. You see, the company has been capitalizing (rather than expensing) a great deal of its development costs.

Over the last year, these capitalized development costs have risen some $300 thousand, equal to about half of the company's reported profit over the same time period. This capitalized account now stands at some $2.3 million, which could be a write-down waiting to happen.

Unfortunately, write-downs are nothing new to this company. Over the last two years, the company has recorded about $5.5 million in one-time expenses, including accelerated amortization of patents, impairment of Goodwill, and legal fees.

Of course, none of these intangibles exist as current assets. As a buyer of a net-net, you may not care about such sunk costs and intangibles. But recall that as an investor you don't get to decide what happens to the cash that *is* on the balance sheet. If the past is any guide, this cash may yet be converted into another risky intangible, rather than be returned to you.

Sangoma is cheap! At the same time, it remains risky because intent and past actions forebode losses in the future. As such, this one could go either way. Good luck!

About the author:

Barel Karsan
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