INFOSONICS CORP IFON
January 27, 2012 - 11:03pm EST by
RoboCop
2012 2013
Price: 0.66 EPS $0.00 $0.00
Shares Out. (in M): 13 P/E 0.0x 0.0x
Market Cap (in $M): 9 P/FCF 0.0x 0.0x
Net Debt (in $M): -13 EBIT 0 0
TEV ($): -4 TEV/EBIT 0.0x 0.0x

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  • Micro Cap
  • Latin America

Description

Background: Microcap with a 44% upside to cash per share. This is a super-illiquid stock so many of you may want to stop reading here. Infosonics (IFON) previously had a ~220M in revenue business distributing Samsung phones into Argentina. That business went extinct in late 2009 after a new 30% import tariff was introduced. For the last two years, IFON has been transitioning to developing and selling its own “verykool” brand of cell phones in Latin America.

IFON now competes in a brutally competitive industry known for its creative destruction with the company having no scale or competitive advantage. This is not a buy and hold forever type stock. The thesis here is that IFON offers an opportunity to purchase part of a company at levels well below its net cash per share that is on its way to profitability.

Surf1680 posted this idea a year ago at $.92 when the stock had net cash per share of $1.21 for an upside of 31% to cash per share. At that point, IFON was beginning its transition from the distribution business and had just launched its first two branded phones. Since then, the company’s cash balance has declined from $17.2M to $13.5M (-$3.7M) from a combination of operating losses (-$2.9M) and an increase in working capital (-$.9M).

Please refer to Surf1680’s write-up for more background about the company, but in brief, IFON is using cheap Chinese engineering labor and open-sourced Android operating systems to design low-quality/price smartphones. It then outsources production to Chinese contractors to manufacture the phones for sales primarily in Latin America, with ambitions to sell into India/China as well.

I am now posting this stock at $.66 with IFON having net cash per share of $.95 for an upside of 44% to cash per share. You may ask yourself why bother with this stock, because if history repeats itself, by this time next year IFON will be selling for $.46 with net cash per share of $.66. I believe that the company has gone through the worst of the transitional cash burn and by this time next year the company will be profitable with a similar level of cash per share.

Despite its operating losses during “startup”, the company has shown decent progress and is now offering around a dozen branded phones for sale. As shown below, IFON has been steadily increasing its verykool sales as well as reducing SGA expenses. I believe that the company is now a quarter or two away from cash flow breakeven and 3 to 4 quarters away from becoming profitable.
 

Recent and Projected Quarterly Financials:

 

1Q11A

2Q11A

3Q11A

4Q11F

1Q12F

2Q12F

3Q12F

Annualized

Distribution Sales

              6,469

              2,318

              1,185

 

               -  

               -  

 

                  -  

verykool Sales

              3,000

              4,000

              5,988

         7,000

        8,000

        8,500

         9,000

         36,000

Distribution Margins

7.0%

7.0%

7.0%

7.0%

     

 

verykool Margins

12.0%

18.5%

19.0%

19.3%

19.6%

19.8%

20.0%

20.0%

Dist Gross Profit

                 453

                 162

                    83

                -    

               -  

               -  

                -  

                  -  

verykool Gross Profit

                 359

                 741

              1,135

         1,351

        1,568

        1,683

         1,800

           7,200

Total Gross Profit

                 812

                 903

              1,218

         1,351

        1,568

        1,683

         1,800

           7,200

SGA

              1,434

              1,276

              1,256

         1,225

        1,225

        1,225

         1,225

           4,900

R&D

                 357

                 394

                 384

            400

           400

           400

            400

           1,600

Total Overhead

              1,791

              1,670

              1,640

         1,625

        1,625

        1,625

         1,625

           6,500

Operating Profit (Loss)

               (979)

               (767)

               (422)

          (274)

           (57)

              58

            175

               700

Depreciation

                    58

                    37

                    43

               40

              40

              40

               40

               180

CAPEX

                      7

                 113

                    47

               50

              50

              50

               50

               180

Cash Flow Before WC

               (928)

               (843)

               (426)

          (284)

           (67)

              48

            165

               700

Cash

           13,759

           14,335

           13,452

      13,757

     13,642

     14,085

      13,985

         13,985

Cash Per Share

                0.97

                1.01

                0.95

           0.97

          0.96

          0.99

           0.99

              0.99

 

While SGA expenses are not likely to get cut much further, verykool sales growth should continue to increase with the introduction of additional smartphones (4 new models have been released since 3Q11).With a couple of quarters of increased sales growth, IFON should be close to breakeven in operating profit. IFON could be cash flow positive as early as 4Q11, as I think working capital could be a source of cash for the next couple of quarters as inventory and prepaid expenses are currently high than likely needed for the near future.

Context and Insider Ownership:

With IFON’s marginal position in an unattractive industry, it’s not inconceivable that the company never makes an operating profit.  But if nothing goes right and the company continues to burn cash at the last quarter’s recent rate, it would take ~3.25 years for the cash per share to equal the share price. In addition the CEO, Joseph Ram currently owns 30% of the stock so he should be incentivized to avoid a dumb acquisition or continue on the current path forever if operating profits never materialize. His 30% share of the net cash equates to about 12 years of his current salary. He is currently 63 years old and has led the company since he founded it in 1994.

Valuation:

Below is a list of possible scenarios and the resulting share prices:

  Low Mid High
Quarterly Sales Level            6,000            8,500            9,500
Gross Margin 18.5% 20.0% 22.0%
NWC as % of Sales 19.0% 13.3% 13.3%
 Operating Income           (1,940)                300            1,860
 Multiple                      2x                    4x 8x
 Business Value           (3,880)            1,200          14,880
 Net Cash           12,401          13,583          14,025
 Net Cash/Sh                0.86              0.94              0.97
 Total Value             8,521          14,783          28,905
 Shares           14,434          14,434          14,434
 Value Per Share                0.59              1.02              2.00
 Gain  -11% 55% 203%

 The company has about $6.1M in operating loss carry forwards, so it shouldn’t be paying taxes for several years.

I think this stock has limited downside due to protection from IFON’s highly liquid balance sheet ($1.36 TBV and $1.33 NWC per share). If operating losses continue for 2 years before CEO Ram decides to give and liquidates, there would still be a gain from these levels:

  3Q11 Liq Value In 2 Yrs Liq Value In 2 Yrs
Cash          13,452          13,452            9,572                          9,572
AR            5,240            3,930            5,240                          3,930
 Inv             3,125            1,250            3,125                          1,250
 Total Liquid Assets           21,817          18,632          17,937                        14,752
 Total Liabilities             4,694            5,000            5,000                          5,000
 Net Liq Value           17,123          13,632          12,937                          9,752
 Shares           14,434          14,434          14,434                        14,434
 Liq Value Per Share                1.19              0.94              0.90                           0.68

You may be able to obtain a higher IRR by waiting a couple of quarters and buying just before IFON's first quarterly result with positive earnings. But beacuse of the magnitude of the discount, I am content to buy right now and wait.

Risks:

Weak 4Q11 results if some of the increase in 3Q11 sales was for Christmas inventory build.

Weak 1Q12 results if Chinese holidays effect production.

Stock price never rerates to cash per share.

Volume dries up and you get stuck in the stock.

IFON never liquidates and margin of safety erodes away. (Inertia is a hard thing to overcome and CEO/Founder Ram hasn’t quit yet with a cumulative deficit of $12.6M)

Catalyst

IFON reaches profitability or market rerates stock towards cash per share.

IFON calls it quits and liquidates proceeds to shareholders.

4Q11 sales increase more than expected due to Christmas season.

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