I don’t believe I have done a detailed breakdown of VATE in the past; this was primarily due to the Convertible notes it had and the potential dilution making it a “trade only” stock for me. However, as time passes, I review new filings to see if trade only stocks can make it to “investment” grade, let’s review the latest.
Share structure: A/S 900m, O/S 500m, Float 383m. Nice numbers here and with an average trading volume over 4m/day it has enough liquidity to accumulate a decent size position without getting trapped in it if the need to exit arises. The recent elimination of convertible notes should stop the slow dilution that has occurred in the last few quarters. Preferred shares potential dilution (all series) amounts to roughly 387m/shares of common; 164m of them belong to KGKG and are unlikely to be converted anytime soon. There are 880k shares of Undesignated Preferred shares which showed up when the Convertible notes were eliminated; there is no conversion rate listed for these and is something worth watching for in the future as the conversion rate on the eliminated notes was quite poor.
The Balance sheet is simply used to determine the fiscal viability of a company. I generally use Cash and Cash Equivalents minus Current Liabilities for short-term solvency, or Total Liabilities for a longer-term picture. VATE has seen steady improvement over the last few quarters; Cash and Receivables currently exceed Total Liabilities which helps to provide confidence in the long-term fiscal viability of the company.
The Income Statement is all about growth. I use three measures of growth; Revenue, Margin and Earnings. When measuring growth rates of company’s that are just coming out of product development or have very small Year over Year Quarter (YoYQ) comparable revenues I prefer to use Sequential quarterly growth rates instead. The last four quarters had sequential revenue growth rates of 18.5%, 6%, 49.7% & 26.4% (most recent). Obviously quite a range of growth rates, but growing none the less, I am using 25% for my future quarterly projections. Gross Margins for the last four quarters were; 75%, 58.1%, 39.3% and 76.1% (most recent), I was pleased to see the gross margins bounce back in the last quarter. I am currently using 65% for my forward projections as I prefer to err on the conservative side. There are currently no earnings for comparison.
If a company is not profitable then the Cash Flow statement can be used to tell us where their money is coming from (selling shares/Conv. Notes etc.). The Cash Flows from Financing Activities section gives us this answer; however, on the Q1 filing this section is not present. I am not concerned w/this due to them only losing $50k for the quarter and at a .04 share price would only equate to 1.25m shares/quarter of required dilution which can easily be absorbed.
The company’s elimination of convertible debt combined with a solid balance sheet and improvement in revenue growth have finally moved VATE into the investable category for me. For fair disclosure, I still hold several hundred thousand dividend shares from its spin off from KGKG.
The profit one makes on an investment or trade is the difference between the entry and exit points, so determining these points of great importance; I use charts to help with my timing and will break them down in another post.
All the best,
Knife
