Vicon Industries is a video surveillance and security systems. Contrary to some of the other NCAV opportunities, business has at least maintained a baseline level – stabilizing at approximately $60 million on the top-line. Understanding that the underlying business is actually sustainable is a significant positive. The product line is high tech in nature which is quick to obsolescence. We are also about to discover another significant risk with regard to technology – patent infringement. Whether the company is in the right or wrong, it can be a very costly battle with very little return on investment. With this in mind, the snapshot of the balance sheet is listed below;
Financials:
2009 Q4 | 2009 Q3 | 2009 Q2 | 2009 Q1 | 2008 Q4 | |
Period End Date | 09/30/2009 | 06/30/2009 | 03/31/2009 | 12/31/2008 | 09/30/2008 |
Assets | |||||
Cash and Short Term Investments | 16.85 | 14.52 | 11.46 | 11.09 | 9.79 |
Total Receivables, Net | 9.91 | 10.65 | 10.32 | 10.49 | 14.76 |
Total Inventory | 11.95 | 12.17 | 12.99 | 13.42 | 12.57 |
Prepaid Expenses | 0.52 | 0.65 | 0.64 | 0.69 | 0.82 |
Other Current Assets, Total | 0.64 | 1.04 | 1.3 | 1.22 | 1.23 |
Total Current Assets | 39.88 | 39.02 | 36.7 | 36.9 | 39.17 |
Property/Plant/Equipment, Total - Net | 5.02 | 5.03 | 4.95 | ||
Goodwill, Net | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
Intangibles, Net | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
Long Term Investments | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
Note Receivable - Long Term | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
Other Long Term Assets, Total | 2.42 | 2.02 | 1.93 | 2.17 | 2.5 |
Other Assets, Total | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
Total Assets | 47.32 | 46.07 | 43.58 | 44.1 | 46.97 |
Liabilities and Shareholders' Equity | |||||
Accounts Payable | 4.01 | 3.79 | 3.4 | 3.86 | 4.27 |
Payable/Accrued | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
Accrued Expenses | 4.14 | 3.96 | 3.66 | 3.39 | 4.54 |
Notes Payable/Short Term Debt | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
Current Port. of LT Debt/Capital Leases | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
Other Current Liabilities, Total | 0.89 | 0.89 | 0.81 | 1.11 | 1.18 |
Total Current Liabilities | 9.03 | 8.64 | 7.86 | 8.35 | 9.99 |
Total Long Term Debt | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
Other Liabilities, Total | 2.88 | 2.47 | 2.37 | 2.31 | 2.37 |
Total Liabilities | 11.92 | 11.11 | 10.23 | 10.66 | 12.36 |
Common Stock | 0.05 | 0.05 | 0.05 | 0.05 | 0.05 |
Additional Paid-In Capital | 24.29 | 23.6 | 23.5 | 23.42 | 23.26 |
Retained Earnings (Accumulated Deficit) | 14.35 | 13.71 | 13.23 | 12.84 | 12.34 |
Treasury Stock - Common | -3.15 | -2.75 | -2.63 | -2.34 | -1.77 |
Other Equity, Total | -0.15 | 0.35 | -0.81 | -0.53 | 0.72 |
Total Equity | 35.4 | 34.96 | 33.35 | 33.45 | 34.6 |
Total Liabilities & Shareholders’ Equity | 47.32 | 46.07 | 43.58 | 44.1 | 46.96 |
The current market cap of $18.7 million is only a fraction of book value. The company is profitable on an earnings basis and free cash flow basis. Given that the net current assets greatly exceeds the entire market cap by a large margin is strange (even after completely stripping out inventory). Furthermore the cash balance only is almost equal to the entire market cap. This isn’t to say that everything is rosy at the firm – the latest quarterly report on May 5th confirms this fact. Orders are down in all channels both domestically and internationally.
What caught my eye on the latest press release was the following statement – {there has been no change in the status of the patent litigation from that previously reported. “We continue to wait for a decision by the U.S. Patent Office Board of Appeals and Interferences,” said Mr. Darby.} To a tiny company such as Vicon, this could be a matter of life and death. Here is the language taken from the company’s 10K;
The Company is unable to reasonably estimate a range of possible loss, if any, at this time. Although the Company has received favorable rulings from the USPTO with respect to the reexamination proceedings, there is always the possibility that the plaintiff’s patent claims could be upheld in appeal and the matter would proceed to trial. Should this occur and the Company receives an unfavorable outcome at trial, it could result in a liability that is material to the Company’s results of operations and financial position.
This is where a strong legal background is essential. One needs to be able to estimate the entire contingent liability and treat it like any other debt issue. It seems, however, that the market is assuming the worst possible scenario – which usually happens in this type of matter. While more research is needed, it seems like a favorable risk reward tradeoff.
Disclosure: none.
