Viper Networks Inc (VPER)

[longvper]

I finally got it. This was a research report dated in 2005. Googled Viper networks past 24 hours, so I thought it was recent.


VIPER NETWORKS, Inc.: (OTC BB:VPER.PK) Rating: Neutral Price target $0.21/share
Financial Summary
52-Week Range Recent Price (4/18/05) Market Cap Current Shares Outstanding Float Insider Holdings Book Value (per share)
US$ 000’s
$0.10 / $0.72 Sales
2003 2004 2005E 2006E
$433 $4,613 $8,300 $19,800
$0.18 $22 Mn 121.2 Mn 44.9 Mn
Gross profit Operating Income
Net income
297 (1,355) (2,201) (1,411)
4,108 (3,284)
6,756 (3,146)
(3,292)
14,118 (448)
(652)
(7,911) (3,423)
Normalized Net income 33.5% EPS
(652) n/m n/m n/m n/m
(3,292) ($0.06) ($0.08) ($0.03) ($0.00)
n/m PE
Source: Yahoo Finance, SEC filings, analyst estimates.
Summary
We are maintaining our Neutral Rating on VPER and are assigning a price target of $0.21/share. The company has released its 10-K report for FY04 with lower that we expected revenues and earnings. In earlier press releases, VPER announced expected annualized revenues of $22 million in FY04 and expected booked revenues of $14 million in FY04, while the reported FY04 revenues reached only $4.6 million. At this stage there is significant information risk that affects our rating of VPER.
However, based on significant industry potential and impressive growth of VPER’s revenues during FY04, we believe that there a strong revenues growth momentum that will continue for at least a couple of years. There is a significant going concern risk and further dilution to existing shareholders, however should the company be able to successfully go through FY05, it may become one of the important VoIP players and realize the potential discussed in the initiation report. Our current valuation model pointed to a price target of $0.21 per share which combined with the superior company-specific risks warrants a neutral rating.
A major risk to our price target and rating is the significant dilution effect due to the need to issue additional equity to generate cash for operations. The number of basic shares outstanding increased roughly seven times during the last two years. In addition, we are expecting the numbers of shares outstanding to continue to grow during FY05 and FY06 as the company’s operations are cash-starved.
Valuation Analysis
We derived our price target based on four valuation methods: DCF, PER, PSR and P/EBITDA. Consequently, we based our valuation model on the following assumptions:
MAJOR ASSUMPTIONS
Stock Price Shares Outstanding, 000’s Shares Outstanding, 000’s, FY06 Mkt Cap, 000’s
$0.18
121,227
137,727 21,820
Cost of Equity 12.7% Long-term Equity Weight 100% Weighted Cost of Equity 12.7% Cost of Debt 0.0% Long-term Tax rate 37%
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Book Value of Net Debt, $ 000’s $0.00 Beta 1.81
Risk Premium Risk Free Rate Small Cap Premium
For PER, PSR and P/EBITDA we selected the Communication Services Industry TTM multiples.
Valuation Ratios
P/E Ratio (TTM) P/E High - Last 5 Yrs. P/E Low - Last 5 Yrs. Beta Price to Sales (TTM) Price to Book (MRQ) Price to Tangible Book (MRQ) Price to Cash Flow (TTM) Price to Free Cash Flow (TTM)
Communication services
15.23 28.93 11.10 1.28 1.92 2.52 5.84 6.94 21.91
Technology
25.93 43.94 17.04 1 2.75 3.61 6.11 14.65 26.71
S&P 500
20.83 41.15 15.56
1 2.84 3.86 7.14 14.8 25.39
US$ 000’s
EBIT* EBIT (1-T) Dep & Amort (-) Cap Ex (-) Changes in Non Cash Working Capital Free Cash Flow
FYE05
(3,146) (3,146) 500 (1,000)
(1,000)
(4,646)
FYE06
(448) (448) 600 (1,000)
(900)
(1,748)
FYE07
2,556 2,556 600 (1,000)
(400)
1,756
FYE08
4,857 3,060 1,000 (1,000)
(150)
2,910
*due to large NOL accumulated, we applied the income tax only to the terminal value earnings.
Tax Effected Cost of Debt 0.0%
Long-term Debt Weight 0% 4.0% Weighted cost of Debt 0.0% 3.5% WACC 12.7% 2.0% Terminal growth 6.5%
Source: http://yahoo.investor.reuters.com/MG.aspx?country=US&ticker=NTOP.O&coname=NET2PHONE+INC&mxid=100097557&target=% 2fstocks%2ffinancialinfo%2fratios%2fvaluation&cotype=1&page=default
Our DCF model produced the following cash inputs for FY05-FY08:
Terminal Value
47,387
Due to the higher risk of VPER, we assumed a 25% discount to valuation multiples to account for small cap, low trading volumes and Pink Sheet trading.
Discounted Cash Flow, $ thousands
DCF stream DC terminal value Total DC Enterprise Value
(Less) Interest Liabilities Equity Value Equity Value Per Share
-2,388 31,647 29,259 (50) 29,309 $0.21
P/S valuation, $ thousands
Revenues FY06E 19,800 Industry 1.9 Premium (Discount ) assumed -25% Company traded at multiple 1.4
Our PE and EBITDA valuations did not produce meaningful results as the company will continue to be in a growth stage in FY05 and FY06 and will not have reached meaningful profitability, so that EPS and EBITDA multiples could be applied.
Weight of methods
DCF 50% $0.21 P/S valuation 50% $0.21
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Equity value Price target
28,512
$0.21
Weighted target price $0.21
OUR PRICE TARGET IS A SIMPLE MATHEMATICAL AVERAGE OF THE DCF AND PSR CALCULATIONS, NAMELY $0.21/SHARE. THIS PRICE TARGET CARRIES A HIGHER THAN AVERAGE DEGREE OF RISK BECAUSE OF THE LIMITED OPERATIONAL HISTORY OF THE COMPANY UPON WHICH MEANINGFUL FINANCIAL FORECASTS CAN BE MADE. ALSO, THERE IS A SIGNIFICANT GOING CONCERN RISK BECAUSE IN ITS CURRENT INCIPIENT STAGE OF DEVELOPMENT VPER DOES NOT GENERATE SUFFICIENT CASH TO SUPPORT OPERATIONS. MOREOVER, IN ORDER TO SIGNIFICANTLY INCREASE SALES AS PROJECTED, IT WILL HAVE TO INCREASE MARKETING AND PROMOTION SPEND, WHICH WILL BE PRIMARILY A CASH EXPENDITURE. WE BELIEVE THAT THE COMPANY HAS AN INTERESTING STRATEGY FOR THE VOIP SPACE AND WILL MONITOR CAREFULLY FURTHER COMPANY DEVELOPMENTS AND ADJUST OUR FINANCIAL PROJECTIONS AND THE PRICE TARGET ACCORDINGLY.
Financial Highlights
Strong revenue growth
VPER reported revenues of $4.6 million for FY04, which is ten times higher than FY03 revenues. While VPER is in the phase of rapid growth, we anticipate that the triple digit growth of revenue will continue for at least a two or three years.
$ Thousands 2003
Revenue 433.4
2004
4,612.8 504.6 -3,284.0 -7,910.9
10.9% ($0.08)
% Chg
964% 270% n/m n/m
-20.6% n/m
Gross profit Operating profit Net profit
Gross margin EPS, $ basic Source: SEC Filings
136.5 -1,355.4 -2,200.9
31.5% ($0.06)
During FY04, VPER tested for impairments the value of intangible assets, which resulted in additional expenses of $4.5 million. We do not anticipate the company to incur additional impairments in the foreseeable future. We also expect expenses to grow at slower pace in the next two three years and project that by end-of- FY06 VPER should break-even.
On an annual basis, VPER reported a net loss of $7.9 million in FY04, compared to FY03 net loss of $2.2 million. At the same time, basic loss per share for FY04 was $0.08, compared to FY03 when the company had a basic loss per share of $0.06.
The ability to continue as a going concern
As of December 31, 2004, VPER had cash and equivalents balance of about $47 thousand. During FY04, VPER financed its operations mainly through equity issuances and loans from shareholders. The auditor also qualified the financial statements because of the ability of the company to continue as a going concern.
$ Thousands
Operating Cash flow Investing Cash flow Financing Cash flow
Cash at the beginning of year Cash at the end of year Source: SEC Filings
FY03 FY 04
-463 -1,728 -28 -936 657 2,539
4.7 170 170 47
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The company has been generating losses from inception, has a negative working capital and an accumulated deficit that raises doubts about its ability to continue as going concern. Moreover, in order to continue the implementation of its business plan, VPER will have to raise additional external financing. However, up to date VPER has not received any commitment for additional financing. According to VPER’s management, the company needs at least $1.3 million in cash to cover its anticipated operating expenses for the twelve month period thereafter. During the first four months of FY04 VPER has announced several instances of additional equity issues to generate cash and cover expenses, as outlined below.
Dilution effect due to significant equity issuance
The number of basic shares outstanding increased roughly seven times during the last two years. In addition, we are expecting the number of shares outstanding to grow further as the company’s operations are cash- starved.
140 120 100
80 60 40 20
0
Basic shares outstanding, end of year, millions 12 1.2
78.8
17 .6
2002
2003 2004
Source: SEC Filings
Summary of the latest fundraising initiatives
Description
Stock options to Officers
Private placement of Equity
One year services agreement with Rhino Capital, Inc. to obtain a listing on a national stock exchange, to raise capital and to manage investor relations.
Stock options to Officers Private placement of Equity
Loan from an Officer Source: SEC Filings
Date
January 31, 2005 February 2005 February 2005
Shares issued
5,150,000 3,000,000 1,250,000
Proceeds
exercisable at $0.20 $180,000
March 8, 2005 March 2005 Q1FY05 $115,000
3,000,000 3,011,111
exercisable at $0.23 $271,000
In addition, on February 4, 2005, VPER entered into five stock subscription agreements for an aggregate of 33,333,335 shares of its common stock in exchange for $5,000,000 in US Treasury Bonds, with both VPER’s shares and the US Treasury Bonds being placed into escrow.
Concurrently with the execution of the agreements, VPER purchased from Cogent Capital for $1 a call option to repurchase at the end of two years 80% of the shares of common stock sold at the then current market price. Also concurrently with the agreements, VPER entered into an equity swap arrangement with Cogent Capital for $50,000 and 3,333,333 shares of VPER’s common stock that entitles VPER to receive and obligates VPER to
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pay the price return of 75% of the shares issued in two years, or sooner if the shares are registered for sale under the Securities Act of 1933. The equity swap also provides for the exchange of certain cash flows, as defined in the agreement.
Development of distribution network
On April 13, 2005, VPER announced that it had appointed, Elex Computer SL as an authorized distributor of its products and services in Spain, Portugal, Andorra and Southern France. Elex Computer SL has already placed an initial purchase order for inventory and a blanket purchase order for an additional 500 vPhones.
Industry outlook
Voice over Internet Protocol is also proving to be an attractive communication service and will show significant growth. ISPs, cable companies, traditional telecom carriers etc. compete in this emerging industry.
Cable companies are becoming more aggressive in deploying VoIP to add voice to their bundle of services. In fact, cable companies had gained more than 3 million telephone subscribers by the end of 2004 and have emerged as a potent competitor to other data transport services.
According to Allied Business Intelligence, the global VoIP market will grow from a seedling market of $46 million in 2001 to $36.5 billion by 20081. In addition, Allied Business Intelligence mentioned that enterprises will move their voice from traditional networks to data networks at a rate that will create a $16.5 billion IP-PBX market worldwide by 20062.
According to Jupiter Research, Voice-over-IP telephony will grow from approximately 400,000 U.S. homes in 2004 to 12.1 million by 2009. The researcher said VoIP telephony would reach 10% of U.S. homes over the next five years and 17% of broadband subscribers would sign up for VoIP phone services.
Currently, the major VoIP market is international calls market, due to high prices charged by Public Switched Telephone Network (PSTN) companies for such services. VoIP is gaining market share from PSTN companies in this filed, taking away about 2-3 percentage points per year.
International calls traffic
VoIP Traffic (billions of minutes) PSTN Traffic (billions of minutes) VoIP Share of International Traffic
Source: http://www.telegeography.com
1998 1999 2000 2001 2002 2003
0.2 1.7 6.0 10.1 18.0 22.2 93.0 108.0 132.0 146.1 155.2 173.8 0.2% 1.5% 4.3% 6.5% 10.4% 11.3%
2004P CAGR
31.1 143% 194.6 13%
13.8%
1 http://www.jefferson.com/newsroom/index.asp?section=newsDetail&newsid=142 2 http://www.cconvergence.com/shared/printableArticle.jhtml?articleID=8707174
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Financial Projections
Net Revenues
Cost of revenues
Gross Margin
General and administrative Equity loss from unconsolidated subsidiaries Loss from operations
Realized gain on marketable securities Interest expense Bad debt expense Other income
Total other income (expenses)
Loss before extraordinary item
Impairment of purchased intangibles
Net loss
Basic loss per share Weighted average number of shares outstanding
2003
433,376
296,853
136,523
1,462,566 29,400 (1,355,443)
8,173 (60,495) 0 (3,048) (55,370)
(1,410,813)
(790,041)
(2,200,854)
($0.06) 37,243,157
2004
4,612,783
4,108,185
504,598
3,660,801 127,800 (3,284,003)
15,761 (73,060) (83,712) 2,327 (138,684)
(3,422,687)
(4,488,238)
(7,910,925)
($0.08) 101,961,298
2005E
8,300,000
6,756,000
1,544,000
4,600,000 90,000 (3,146,000)
0 (47,520) (98,551) 0 (146,071)
(3,292,071)
0
(3,292,071)
($0.03) 128,351,899
2006E
19,800,000
14,118,000
5,682,000
6,100,000 30,000 (448,000)
0 (40,000) (163,617) 0 (203,617)
(651,617)
0
(651,617)
($0.00) 136,226,899
2007E
34,650,000
23,493,750
11,156,250
8,600,000 0 2,556,250
0 (40,000) (245,425) 0 (285,425)
2,270,825
0
2,270,825
$0.02 140,313,706
Sergiu Lisnic, CFA is a Senior Analyst with Spelman Research. Prior to joining the company, he worked as an analyst for Evanston Capital Advisors for a year and a half, and subsequently served for two years as a financial analyst with a gas distribution and a FMCG company. He was primarily responsible for financial statement analysis, budgeting and reporting to shareholders. He earned the CFA title in September 2003.
Spelman Research Associates, ltd, is an independent fee based research, publishing and distribution firm whose contract analyst adhere to the ethics and standards of the Association for Investment Research Management. The views expressed in this research report reflect the analyst’s personal views about the issuer and its securities. Opinions and recommendations contained in this report are submitted solely for advisory and information purposes and are not intended as an offering or a solicitation to buy or sell the securities mentioned above. The analysts are responsible only to the public and this report is not a service to the company. We received a fee of $19,500 from the company for one year’s coverage. We do not inform any company in advance of the nature or conclusions of our analysts’ reports in advance of paying the fee nor can a company withdraw from coverage before the expiration of the one year term. Neither the Analysts nor the company own equity or debt securities of the companies on which our contract analysts report. More information about Spelman Research’s policies are available at www.spelmanresearch.com.
Spelman Research Associates, Ltd., 545 Madison Avenue, Suite 200, New York City, NY 10022 Phone: [phone] Fax: [phone] Web: www.spelmanresearch.com Email: [e-mail].
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