Validian: Positioning For Growth

The major difficulty when writing about microcap stocks (stocks with a market cap below $50 million) is the uncertainty surrounding them. Established investors normally stay away from these stocks, seeing them as very risk. However, it has to be noted that some well-known blue chips on the stock market today were at one point in time microcap stocks. Validian Corp VLDI is a small cap stock that might be interesting to take a look at. The company has been steadily building up its cash reserves and its stock price has been rising on the back of potential revenue growth.

Company Background

Validian Corp is a software development company catering to both public and private companies. Its speciality is in securing data transfers between mobile applications and their respective web servers or on a peer-to-peer basis. The company also provides secure data storage and transfer services for health centres, digital media houses and transportation companies among others. The company changed its name from Sochrys.com Inc. to Validian Corp in 2003. Its headquarters are in Atlanta Georgia. The company currently has 11 full time personnel, whilst most of its products are in development and testing phases.

Beyond the numbers

As already stated, the company does not have any significant revenues to talk about. Losses have been widening on an annual basis as the company seems to have been increasing its SG&A costs. Under normal circumstances, this would not be received as goods news, as a company is generally expected to keep its fixed expenses under control and actually be working on reducing them. For Validian Corp, we can safely speculate that the company is probably getting ready to go commercial with some of its products and this might be leading to an increase in marketing and selling costs. This trend is normal with biopharmaceutical and tech companies as they transition from being just research and development entities to profit making enterprises. On an annual basis, SG&A expenses more than doubled between the year ended 2012 and 2013, increasing from $646,000 to $1.4 million respectively. The company also saw an increase in research and development expenses within this period.

Although the company is operating under a cash squeeze, cash on hand has been steadily increasing on an annual basis. Validian Corporation cash reserves amounted to $104,000 as of the end of December 2013, a big increase from the previous year.  Considering that the company is burning 10 times of that at any given quarter, short-term financing options are keeping the company afloat. The company has been delaying in meeting its short-term debt obligations. As a result, both short-term debt and current liabilities have been on the increase.  In 2013, the company raised $753,000 through debt offerings an increase from just $279,000 of the previous year. This means that there is some confidence in the company’s business model hence its ability to be able to keep on raising new cash, however at a great expense.

Rivals

To better understand how Validian Corp is doing we need to take a closer look at main competitors such as Checkpoint Systems, Inc. CKP and Verisign, Inc.

VRSN. These two are some of the big names in the industry while there are some microcap stocks in this sector such as 01 COMMUNIQUE LAB IN OCQLF, Oramericas Corp PRYNF, etc. Most of these do not have sufficient information in the public domain in order to draw any conclusive analysis.

Checkpoint Systems, Inc

Checkpoint Systems, Inc. is a global provider of loss prevention and inventory management solutions for companies in the retail sector. This includes the popular tags attached to merchandise to prevent shoplifting and sometimes used for general tracking purposes. The company is currently implementing a three year turnaround plan, the primary goal of which is to reduce operational costs and to improve the bottom line. The company’s shares are up by just six percent on a year-over year basis. Lots of volatility has been seen on this stock during the last 12 months. At present the company seems to be succeeding in keeping costs under control but it is having problems increasing sales. Total revenues for 2013 were almost the same as those for 2012. Hence most investors seem to be mostly watching from afar. The company currently has about $121.16 million in cash. Its earnings although improving are still in the red. Debt levels are reducing but not fast enough; the company’s debt to equity ratio currently stands at 24.56.

Verisign, Inc.

A blue chip in the digital security industry, the company is expecting to see revenues grow by 5% this year. The company has a 47% market share in the global domain registry market, having handled more than 100 million .net and .com registrations last year. Not all is rosy in this giant company however. Its share of domain registrations has been steadily declining over the last few years. Since the beginning of 2014, the company’s shares are down by 20%.  The company also does not have a history of paying dividends and it is current sitting on $1.72billion of cash.

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Trading at just 50 cents per share, which is quite high for a microcap stock, this company designs and markets remote access solutions to clients in North America and Japan. Its products include remote desktop access, which allows anyone to control their personal computer from almost anywhere, and remote help desk services. In addition the company also distributes various voicemail and fax services. Its key clients are small-medium sized businesses. There is not much financial data available about this company in the public domain. However, data provided by Capital IQ shows that the company currently has about $2.35 million in cash, has revenues of $1.06 million a year and earnings per share during the last three months were at negative $0.04.

Growth Depressed

Based on an analysis of key fundamentals of Validian Corp and other players in the sector, industry growth seems depressed. These are signs of a market that is saturated or whose current technologies and products have matured. Market conditions are going to favour companies that are able to diversify and offer customers new products that are of high value.

Validian Corp’s Proprietary Technology has an edge

Although having limited financial muscle, this is one area Validian Corp is strong in. Over the last two months the company has released new products that could be the game changer in the industry. In March, the company announced through a press release on Globalnewswire that it is launching the next generation cyber security technology and had already entered into a partnership agreement with one company (name not mentioned) for testing and installation. Focus was going to be on securing mobile applications, either already existing and deployed or in the development phase. The company CEO mentioned that all mobile applications are vulnerable and easy for hackers to gain access to and thereby gain access to user data. The company believes that this is a high growth niche market that only Validian Corp has the technology to best serve.  The technology that Validian Corp offers is the only one that can prevent cyber-attacks at the application from happening in the first place, not just detect cyber-attacks once they are happening and then take steps to mitigate damage. The overall market for Intrusion Prevention Systems is believed to have been $1.9 billion in 2012 based on data from research company IDC. Recent data may be difficult to come by but it would be fair to estimate about 10-15% annual growth since then.

A hidden Top Performer

A close comparison between Validian Corp and key players in the industry such as Checkpoint Systems, Inc. and VeriSign, Inc. shows that the company’s stock has performed 80% better than that of other players over the last two years. Of the three companies, Validian Corp seems to be the only one with high growth prospects.

The other two might be recommended stocks for conservative investors that are interested in securing the value of their investors, but they offer very few growth prospects and unless we see any significant turnarounds, expect their stock prices to remain almost flat or even decline.

Validian Corp seems to be on track to outperform. However, it is not attracting much investor attention at the moment. For the patient investor who loves high risk but high growth stocks this could be the company to buy into. Not to mention the fact that insider and institutional investor involvement in this stock is low. These two groups combined own not more than 20% of the company. This means that a great deal of the company stock is freely available for the private investor. Having recorded 252% growth over the last two years, this company can easily pass the $1 level even before it even goes commercial, at which by then we may see further growth.