VirTra Systems announced this morning it has entered into a definitive merger agreement with it’s target acquisition. After reviewing the 8k filing, here are my initial impressions.
First, if completed VTSI will end up with $30 million in annual sales. If they have reasonable cash flow, this will serve to take a lot of risk out of owning this stock.
However, there is a midly troubling element. Here’s an excerpt from the SEC filing:
“ If the merger is completed, the shares of our Company outstanding at the time of the merger (expected to be approximately 65 million shares) will be changed into 8,512,920 shares, and the shareholders of Virtra Merger Corporation will receive 7,803,795 shares of our common stock. In addition, holders of 141,841 shares of outstanding preferred stock of Virtra Merger Corporation will receive 141,841 shares of a newly created Series A Preferred Stock, with each share of the Preferred Stock convertible into 8.9 shares of our common stock. “
get this deal done on these terms, shares of VTSI will be rolled back or reverse split on about a 7.5 for 1 basis. Anotherwords, every 7.5 shares you own will become 1 one share.
The company will then purchase the acquisition target for 7.8 million shares of stock, or about $6.5 million worth of stock. For $30 million in revenues, this seems like a good deal to me for shareholders.
The one minor negative is the reverse split. 16 million shares at about $1, with $30 million in annual revs seems like it offers a lot of upside.
Shareholders will be asked to vote on this merger. Makes sense to me. I am voting in favor.
Please comment further on “mildly troubling element” and why it is troubling and on “minor negative” of the reverse split and what the negative affect might be for shareholders. Thanks
Editor: In general, reverse splits are considered negative. They tend to be a hallmark of failed companies who have issued too much stock and need to reset their capital structure. They keep issuing stock to raise money because of a faltering business model. Ater a reverse split, they can start the whole process all over again. In this case, there is an element of those characteristics, but post merger they should be in a position where it won’t happen again.
I have been screwed on a reverse split before so this makes me alittle nervous. Do you think it is better to sell the shares before the split then buy them back after or just hold on to the shares and hope for the best after the reverse split? Say I have been holding 20,000 shares for the last 2 years. What’s best?
Editor: If the company was failing to produce results and just had so many shares I&O that they wanted to start the financing process all over again, I would say sell. But, in this case the stock is already beat up, and the company will already be healthy after the deal. Therefore, I would say just hang in there unless you have had enough and just want out.
Like Mike, I’ve been holding 30K shares for two years now. Bought at .34 on Jan 29/04 I’m down 63%. Yet, thru it all I’ve felt the company had a technology and product that would find a ready market. Unfortunately, it appears that government departments, who would be buyers and really drive the share price with their orders, need every $ in their budgets to continue supporting the war on terror. Fortunately my investment here is very small compared to my total portfolio and I’ll patiently wait for what I expect will be a reward somewhere down the line.
Editor: Don, thank you for your contribution. You have to hand it to Kelly Jones- while they are stuck in a down cycle for their products due to the immense amount of money we are spending on the war, they have found a way to get to fiscal corporate health. I seems like shareholders might have some reasonable upside from here, and the downside will be reduced dramatically.
With VTSI at .13 and a 7.5 to 1 reverse split calculates to 0.975 cost. And with VTSI now spporting a healthy positive cash flow do expect that shares of VTSI will at least meet our cost?
Editor: My initial and rather crude calculations have VTSI worth about $3 per share post deal based on trading at somewhere between 1 and 2 times sales. That is not to say the stock will automatically go there- since reverse splits are generally viewed as negative, it could struggle for a time.
I have about 1600 shares at .24-entry level for me. Do you think I should get out before the merger and cut my losses?
Editor: That’s less than $400 total. It depends on your time horizon. If you are prepared to hold for another 6 months to a year, I would hold and/or pick up more. If you are less patient, sell it and move on.
I’m writing to ask your opinion. First of all: these are my gains made with your “advice”: AVN 15,50% – ERES 20,60% and HDY 62%. My present position is: VTSI @ 0,19 – KAL @ 1,47 and TLPE @ 0,34. I’ve been reading all your posts but I’d like yo ask yuor opinion about: 1) VTSI: according to the prevoius email, What’s yout target in a year’time? 2) FMLY: I’d been following the company since you covered it and i Like it – When you said “next generation”, how many years did you mean? 3) What do you think of a small company called AXTI? Thank you for your ideas and cooperation.
Editor: 1. You should still own some HDY, but hard to buy at current levels. 2. FMLY: The next generation will have a chance once the company pays off its toxic debt and then reverse splits the billion plus shares that will be I&O. I don’t know how long it will take. 3. KAL at $1.47 should pay off. 4. VTSI at $.19 will require several months patience before things pick up. Would only sell if you need the cash. 5. TLPE: You own it a little high, but it shouldn’t matter. Our initial entry level was around $.25. It has a real shot at $1 if telecom becomes hot in the market. 6. Don’t follow AXTI
sales have been quiet for sometime now. heard of anything coming through the pipeline? what do you thing 4yh quarter est. will be?
Editor: No, I haven’t heard any mention of any recent new sales. The future of the company appears to be subject to getting their acquisitions done. In my view, that is just a question of time now that they have a definitive deal.
If you want to make money in this game you certainly have to have time and deep pockets unless you know the short cuts. I have neither but have always believed in the product thus held on for so long and have no choice but to keep patient and wait. Now I wish I knew whether to buy more now or wait til the split. As you said, it could struggle for a time. Can you explain more about the preferred stock that will be remaining after the split. Is this stock available to anyone? Why is it there and how does it work in the scheme of things?
Editor: I believe the preferred stock is being issued as part of an asset purchase. Therefore, individual investors cannot participate. I’m sure it has some sort of conversion feature into common stock. As far as this end of the market goes, it is best for people who like to speculate and have a reasonable amount of discretionary cash they can take risk with. It is best to own 5 or 6 different microcap stocks to find a big win. There are no short cuts. You have to be lucky, have good instincts, and patience. If you have limited capital, just stick with what you have and hope for the best. I would not buy VTSI until a couple of weeks after the reverse split. Let’s see if it wants to come down a little.
from what i read in the filing the A preferred could be converted 1 share to 8.9 of the companyl stock am i right?
Editor: I haven’t researched it in detail. Not much to worry about until we see the proxy statement. It will all be spelled out there.
It looks as if no one is going to move until the split is done by the way the stock is moving. Even though VTSI has gone into FATS territory and made sales in the Malaysian market and made a 2 million dollar deal through Dynalyst no one is moving. What do you think? Too cautious or what?
Editor: I am hearing it is taking forever to get the proxy statement done, and the company doesn’t anticipate it will get the deal done until June. That being the case, it could perk up, but they need to get this merger out of the way. Apparently, they have a pretty big back log of potential new business, and it could start behaving better. For the time being however, the market does not like the delay.
dear editor this sure has been a mentally draining downward cycle…don’t you agree. Can you give me any indications or rumors that this thing is going to turn around? Whats your take on this. Thanks Teeroy
Editor: I am hearing from the company it is now going to take out until June to get this merger completed. Then, it will be full steam ahead. In our corporate account we have nearly 300,000 shares which have taken a beating. I am simply going to wait it out.
When will this split take place? Also with the price so low now wouldn’t it be better to take advantage of the stock at this price rather than wait til after the split? Even a bust wouldn’t cost you that much.
Editor: I’m not sure what split you are referring to. There is no split contemplated that I am aware of. As I have been saying all along, the stock is a heck of a buy for long term investors, because you don’t know when they will finally get this merger done. However, last I heard, it is simply a question of getting through the regulatory process.
I was talking about the reverse split but obviously that takes place after the merge. Now I find out that filing won’t take place until at least May 15 then the proxy vote won’t happen until 5 days after SEC approval. No wonder there is impatience with this stock. After the annual report the price keeps going lower and lower even though deals have been made. They just haven’t been paid. I know there is money to be made but it plays on your patience for the average investor. If I wasn’t in the middle of a separation I would really like to buy another 10 or 20,000 shares at this price. Maybe more because after this merger is done and some bills are paid, new orders will be coming in and whoever held on should be happy they did in my opinion (I hope). I have never held on to a stock as long as I have with this one but then again I am a novice investor and have always been told to stay away from the penny stocks from financial advisors.
Editor: You seem to have a pretty good handle on the situation. With regard to your financial advisor- almost all financial advisors will tell you that for two reasons: 1. You are not trading their ideas. and 2. Penny stocks are very risky. If you are a risk taker and like this end of the market there is no reason you shouldn’t trade in penny stocks. If you are risk averse, it’s not for you. The key is to trade with a suitable amount of capital relative to your wealth. Make it a small amount- I would say no more that 10% of your stock market dollars.
Kelly Jones surprise resignation so far hasn’t been explained and it obviously unnerved the market coming in the middle of this merger situation. Have you or anyone facts on a ‘strategic decision’ so controversial and polarizing that Jones would resign over it despite being the company’s largest shareholder? My e-mail to Mr. Farris has not yet elicited a response.
Editor: This came as a complete surprise to me. I have no idea how to comment other than to say Kelly Jones was the driving force behind the company. Seems like a major negative at first blush.
Any thoughts about Kelly Jones’s resignation?
Editor: This came as a complete surprise to me. I have no idea how to comment other than to say Kelly Jones was the driving force behind the company. Seems like a major negative at first blush.
I would like to know what the disagreement was for Mr. Jones to quit. This is like a knife in my back after I have been so faithful to the company. I was going to wait anyway so this won’t change my decision. I just hope the reverse split is not going to split even more and leave us investors getting screwed. Actually I think Mr. Jones could have waited until the merger before quiting to protect the investors. To me it feels like he did this on purpose and to prove a point. To show his power within the company and he did it. I really liked him but his timing is awful. After listening to all his company lectures I feel let down. What do you think?
Editor: Since I really never had any contact with anyone else in the company, I can’t really say what the correct thing to do would have been. I have to say the only reason I stuck with the company was because Kelly Jones kept assuring me he would get things turned in the right direction. So much for assurances. Whenever the stock bounces I will probably just sell and be done with it. I hate grinding over failed ideas- better to just move on to something new and focus on it.
The latest press release on strategy seemed to be mostly meaningless fluff and gibberish, cliches out of a B-school. By virtue of its lack of substance, it raises more questions than it answers. How disagreements over such semantically null hoo-hah could be grounds for the former CEO and largest shareholder to quit the company is baffling. E-mail to the acting CEO garners no response. I notice that VTSI turns up on the Regulation SHO list (repeated ‘failures to deliver’) which suggests naked short selling, another complication in the mix and one which it is difficult for me, anyway, to sort out.
Editor: Of note is the fact that I didn’t publish any commentary on that diatribe. It was nothing but hot air, totally absent of facts or any suggestion of how they plan to achieve their stated objective. I want to make a million dollars tomorrow, but I don’t have a plan. Nevertheless, I am informed that the merger is still going forward, and once completed we have a chance of a revival. Without the merger, zero is probably in the cards.
vtsi = overpromise and no delivery. have you talked to the anyone at vtsi because i can’t get an answer since kelly left. if you have talked to someone what’s the story with sales, the merger and the proposed sale of company assets rumor??? thanks
Editor: I have spoken with their internal IR guy- I asked him to have management call me, but no such call has ever materialized. He claims the deal is going to move forward, but I haven’t seen a proxy statement yet, which seem absurd. I am now looking at this as a probable tax loss. Lucky for me, I’m in a position to need a tax loss so far this year. At this point, it hardly seems worth selling unless you have a whole bunch of shares.
The math is wrong .Counting the preferred the # of shares will be over 18 million for $30million in sales and no estimate of profit.This thing is going in circles.
Editor: I’m not sure where you are getting your information- I haven’t heard word one of any kind from the company, and there has been no release I am aware of.
The feedback I get is that there is going to be some action soon. How soon…I was told very soon so lets hope it’s true and it’s good. I’ve already waved bye bye to an investment that is ten times less then when I started. I was even stupid enough to pick up more of it just in case. What the hell, it’s only beer money anyway. I’m just hoping for the best but mostly, I just want this thing to get going so we know what’s happening. My source is usually quite reliable otherwise I just don’t get answers.
Editor: Hoping to turn the beer money into champagne. I was with you. One of the keys to being a good microcap investor is learning to accept the inevitable losers and moving on without it changing your resolve. Regardless of what they say, I believe the loss of Kelly Jones was really a major blow to the credibility of the management. He was the one that turned the company around and gave them a chance. They had their chance- they got a $20 million order from the Marines verbally. Then the funding was pulled. Had it come through, we would have had a winner. Life goes on. Tax loss sale for me.
I hope that the new CEO isn’t the only news coming out in the near future. Maybe with him in place they might have a better chance of landing that military deal. Now it’s the merger that we all care about but as long as they can drum up some buisness without the merger I will be happy to see the stock go back up into the .20′s.
Editor: As would I. However, there are a lot of components to being the CEO of a microcap company. Sales is what this one needs. Perhaps he can make it happen- however, the problem for the last two years has been the War in Iraq- the DOD has no budget for these kinds of things. The Marines had a $20 million order, but were refused the money. I don’t believe the new CEO has the power to change the environment. Nevertheless, the change is good and things don’t seem like they could get much worse.
What’s more important right now? Merger or sales? I think merger. Sales will continue, but merger is what is needed right now for financail stability. Do you think the merger will happen in August or is the merger caput?
Â
Editor: In my view, the company is dead without the merger. I don’t know the status as I don’t really communicate with the current management.
The new CEO’s press releases have the sound to them of an “in charge” kind of guy, which is what everyone would expect of a retired general. Initially, of course, the market responded positively — although getting rid of the interim guy and replacing him with anyone was a positive development.
Still, making the right noises doesn’t necessarily translate to meaningful change. (Medical students are taught to sound authoritative and confident, too, but often run bluffs when they haven’t the knowledge or experience to know what the right answer is or what to do next. I’m told much the same is true of military officers. We all know this time-honored approach worked out so well during the Charge of the Light Brigade.)
To me a major point of concern is that this guy doesn’t answer e-mail any more than the interim CEO who wrote the hot-air ‘strategy’ press release did. When CEO’s of ‘real’ companies wilh millions in sales and repeatable quarter-upon-quarter growing earnings have taken the time to e-mail or phone back sometimes that very day, there is little excuse for not creating at least a little scripted acknowledgment to respond to shareholder inquiries.
There was little fanfare to the resignation of the CFO when General Dalby took over, or to the change of auditors. May have missed those altogether in the swirl of activity when Kelly Jones left.
Unrelated, I’m curious what Kelly Jones has done with all his stock. Often management that has left active participation sells out. Any idea? I saw no changes in the SEC reports I scanned.
Finally, for a merger that is both hanging fire and appears vital to the viability of the company, the ongoing silence is of concern.
Editor: When the stock spiked to about $.08 I sold the remaining shares we were holding. We had reached out to the company to start a dialogue, and there was no response. We have been a powerful ally, and the fact that they didn’t respond told me they were so challenged trying to keep things alive that I didn’t see the point in remaining a shareholder. At the current time, I have no faith in anything that is happening at the company. If that changes, I will publish and let everyone know. Too bad- this company was one event away from major success. Had it not been for the resources required in Iraq, they would be filling a $20 million order with the Marines. The order was given, then the funding was pulled. Shame. Time to move on.Â
Editor: I understand that you have reached out to the company to begin a dialogue and have received no response. Do you charge a fee for this dialogue? I didn’tthink so. I really don’t see any other reason why they wouldn’t want to have it. May I suggest reaching out to Steve Haag, vice-president of investor relations, Houston, Texas, (832) 242-1100 – shaag@virtra.com
He has responded promptly to all my inquiries (always by phone, by the way). However, I’d be curious to hear what kind of DIALOGUE you had with him! I look forward to your response……………………………………..
Editor: No- there was no charge for reaching out to the company. More of a curiosity call to be informed about what is going on. And, yes- Steve Haag was where we started. We suggested he have the new top management call and get a dialogue going- no return call. Considering how many people we reach, that is all I need to know about the “new management”.
The Marines have landed…at least, 5% of them:
http://biz.yahoo.com/prnews/060926/datu021a.html
Editor: Looks like things are perking up. Â
any thoughts on these two new contracts and where the company may be heading. according to new management they have a considerable amount of sales landed for the near future.
Editor: Yes, the stock is certainly perking up. I have called them for an update, but haven’t heard back.Â
…now the Mexicans have joined the Marines:
http://biz.yahoo.com/prnews/060928/nyth063.html
VTSI has perked up nearly 50% this week so far. The bad news is my math skills suck…it was 2.5% of the promised Marines who landed (a $500,000 contract in lieu of the never-funded $20MM deal), not 5% as I said in my last post.
Brad Hessel
Editor: It’s not about today’s math, it’s about the trend. The trend here is improving. However, there is nothing here that breaks the old pattern of the sporadic flow of small orders. It’s just a struggle to stay alive for these guys. If it changes, I will cover it. Could be an opportunity.
It’s been about 8 months since any comments on VTSI. Just wondering what you may see in this as it is still covered. The last comments concerned a reverse split but it hasn’t occured as of yet.
Editor: My only comment is that it is nice to see them getting a little sales traction again. I’m not even starting to think this might be the beginning of a new frontier- they have proven they can get one and two orders many times in the past. They never turned into anything significant. When they lost the $20 million order to the Marines thanks to the funding pull back, that took away the huge upside. If they line up something like that again, I would have another look perhaps.Â
Editor wrote on 1 Oct 06:
> …I’m not even starting to think this might be the
> beginning of a new frontier- they have proven they
> can get one and two orders many times in the past.
Well, this time it is three new orders in quick succession, and the latest one is the first ever from the USN:
http://biz.yahoo.com/prnews/061003/nytu102a.html
Having said that, I agree with your conclusion. The Marines order was announced as $500,000 and the Mexican and USN orders – each for one simulator with no dollar amount announced – were probably one-tenth of that. Here is how I am looking at this: if – as the market has told us – the company is worth 40 cents/share with the $20MM order seemingly in hand and about 4 cents a share without it, then it seems reasonable that adding back in 2.5% of the Marines order should bump the stock up a cent or so (2.5% of 36 cents is 0.9 cents). Landing the Navy, even with a small order, is worth something, too, so a fair value here is probably between five and six cents per share.
Thus, the stock is ahead of itself here…unless the drumbeat of new orders continues, of course.
Even so, if it will take $20MM in new orders to get us back to 40 cents, then in the last ten days we got $600M closer on three orders. Assuming future orders average $100M, we need 194 more of them to get us there…at three orders every ten days, that will take 640 days. If the new orders average $200M each (very unlikely based on past history), then it would take a year.
Of course, if anything like this dream scenario occurs, the actual stock price will fair outpace the fair value for a considerable spell. But the takeaway point here: it’s a long, long way to Tipperary.
Editor: Pretty good analysis of the upside- as good a way to look at it as any. If we are talking about the upside for the stock, I have found over the years that stocks tend to go up when investors feel things are getting better and the company has ARG- Accelerating Revenue Growth. If they keep rolling, there is probably a double in the stock from here. One issue that might skew your thinking- the number of shares I&O since the last time the stock went to $.40- if they are raising money, that market cap may have gone up. Meaning- $.10 per share is a whole different number if there are 100 million I&O or 500 million I&O. This company has always kept that number reasonable, but it’s been a while since I even looked at the number. Perhaps it is time. You can find it at the beginning of their recent 10q’s.Â
I think it is great to see these contracts happening. How many has it been in the last week? Who knows, maybe this is just the beginning. I’m holding on until the shares can reach the .30 mark or close to it and then we’ll see what’s going on if they can reach that mark. I’ve been in for about three yrs now and have always said that I’d stick with them to the end or until I make some money. If they do make some money, that’ll be like winning a lottery now. I said goodbye to that money long ago but have always had faith in their product. Still wondering whatever happened to that merger though. Who’s going to answer that one? I know one thing and that’s the move they made plus the enlargement of their facilities and manufacturing plant. They must have had some positive plans in store for the future.
Editor: I agree- I hope the stock can get back to those levels, and I like that you have the courage to stick with your plan. If you were in CPNE with the same plan, you would either be closing in on or already making money again and looking great. Perhaps VTSI can be the next CPNE. That would be great.Â
Another day, another contract…this one a ten-simulator order from a training company that in addition to using VTSI’s technology for their training work will be selling the simulators and expect to generate up to $2MM of annual sales for Virtra…now we up to replacing 13% of the lost Marine contract, which puts as at a back-of-the-envelope fair value of around 8-9 cents/share.
http://biz.yahoo.com/prnews/061010/nytu097.html
Editor: This company has really got some momentum going. Good for them.Â
I don’t think there is any reason to keep comparing the new contracts with the big Marine Corps contract that is probably gone. I’m just going to ride the new ones coming in and hope that they keep coming in. Yesterday doesn’t matter to me at this point. I’ve got a positive outlook right now and if they sell what they have predicted I’ll be a happy camper.
Editor: It’s really gratifying to see the stock trading so well and the company coming back. I agree, the comparison is not quite realistic. The stock was trading at $.40 with the Marine Contract never inked. Maybe this is the next CPNE.
I was just wondering if you would have an idea of what it would take to see the price of VTSI go up another .20 in the future. Do you think we need to see a large order or just to keep the continuing sells so that each quarter shows some growth? Or both. I know it takes sells but how do you make disgruntled investors finally somewhat content. It reminds me of trying to get back fans after a baseball strike.
Editor: Certainly that would be the case. Keep announcing contracts. Here’s what I don’t know- what are they going to do for money? If you have read their current proxy statement, you know they have taken on some sort of convertible debt, and they have run out of shares they can issue to pay off that debt. This is a major technical negative. Forget contracts- worry about massive excess supplies of stock.Â
The first of what I hope is a string of sales to a private company. It’s really nice to see an overall increased interest in Virtra Systems product line. I wonder what the extent of the US private corp market is?
Editor: I suppose the market size could be high for private sector companies- after all, there are a lot of private sector companies requiring global security teams. However, I recently looked at their proxy statement. The company has “run out of shares” it can issue to its debt holder to satisy its debt requirements, and is asking shareholders to approve changing the I&O from 100 million to 500 million. I would think it will be nearly impossible for this stock to go anywhere for quite some time.Â
After listening to the conference call it is clear that they need the shares to pay down alot of taxes and the extra shares is for future use they would put in trust . The General said he had 2.5 million in contracts and without those shares could not build those units.There isn’t much choice on voting the proxy and I think the way the General has been bringing in these contracts that it may not take that long for him to start the price of shares going up again. I like the way he thinks by going for it all at once instead of most likely making more proxy votes in the future. I think he runs a company the same way he would run a squadron. Better to go into a situation having more than you need then getting stuck short and running into problems. As long as he stays with the company there shouldn’t be any problems.
Editor: I agree the company might not have many problems, but the stock and the company are two different issues. I dont believe this stock is going anywhere for the forseeable future. Please note the reason the company needed to move up the authorized number is because they are in default on their debt- they have simply run out of shares to issue to debt holders. As soon as they can issue those shares the debt holders will be in a big hurry to sell – no doubt. I believe there will be pretty massive excess supply for some time to come. Too bad they couldnt get to this point without polluting their balance sheet so badly. If you are in, be in for the very long term- several years.
Most of this debt was inherited by Kelly Jones. So before anyone crys the blues about losing him, he is the one who got the company in this spot to begin with. This would have happened sooner or later so now I have to wait it out. Again! It’s getting frustrating but I might as well forget about it. I’ve got bigger fish to fry. Who knows , maybe I’ll pick up another 30 to 50,000 shares in the next year or two and the price will start going up.
Editor: You could be right. I noticed he filed a law suit against the company for back pay of $1/2 million. Interesting to see where that goes.
I know we have a long way to go but did you read the annual report for 2006? It was very encouraging to hear the progress the company has made. If the company keeps making strides like this word might finally get out and it doesn’t hurt to hold on to worthless stock and hopefully start to look like someone knows what they are doing. Go Virta go. Will you ever cover this stock again or is that too far down the road?
Editor: I won’t cover them again because of the structure of their financing. It is death to investors. However, they are making progress on the top line side, which is nice to see.