I love finding stocks entering serious inflection points that are about to lead to consistent sales and earnings per share growth, where perceived risks are potentially being overestimated. I think I found a company that is in this position, at least for the short-term. The stock should trade significantly higher based on its recent earnings trends, contract awards and a new market opportunity in an industry segment (edge computing) that is gaining attention. We are setting an initial price target 30 to 40% over current prices, or a meager P/E of 10 on the company’s annualized non-GAAP EPS using Q3 2017 as a guide. The current backlog of several hundred million supports a case for Q3 revenue of $79 million at least being maintained over the next several quarters.

On 2/20/2018, I released a podcast episode discussing this stock.  Although the stock has gone up a few dollars since then, it has a ways to go to attain premium valuations.

A good number of caveats exist that will need be alleviated for shares to reach my target. GeoInvesting’s position is small as we continue to assess some of these caveats, which we lay out at the end of our analysis.

This story begins like many microcap stories do, where a management team makes missteps in their going public process. The CEO of the company had some experience in the telecom industry (level 3 background) and saw that the fiberoptic infrastructure industry was going to boom. As a result, he and a current board member founded the company in the early 2000’s.  The company’s revenue quickly reached $30 million.

Management realized that they had to raise capital to grow and completed a reverse merger in 2013 to go public by acquiring a shell.  Not too long after the consummation of the reverse merger, some baggage from the shell that management missed during the due diligence process surfaced.  It turned out that the shell still had about $3.0 million in outstanding debt and some SEC “failures to file” compliance issues that led to the stock being temporary suspended from trading in August of 2014.

The company regained compliance by early 2015 (basically by going public again through a Form 10 registration). Still facing their debt crisis, management was advised to enter Chapter 11 bankruptcy to wipe the slate clean. Doing this would have wiped out the equity stake of its common shareholders at the same time.  From a cosmetic point of view, the outstanding share count was high and unattractive, with over 140 million shares outstanding after the reverse merger.

Admirably, management opted to stay the course and take the harder road to recovery by ramping down growth to about $15 million in revenue and refinancing its debt. Today, the company’s divergence  in key ratios between the company and its peers is significant and indicates that it is trading at a very distressed valuation that we believe could be worth a multiple of its current share price.

Thank you

~ Maj Soueidan, Co-founder GeoInvesting

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