Virtutone (VFX.v): wholesale division analysis (profitable, generates cash and has no debt)

Virtutone Wholesale division analysis

On June 27th, Virtutone announced it has secured additional financing under its bank facility agreement. The added financing will be used to assist in managing growth of the company's wholesale division. Under its new facility, the company may borrow up to $2-million, provided the borrowings outstanding do not at any time exceed 75 per cent of accounts receivable as defined in the credit facility.

Investors now have the mathematical parameters to assess the expected volume of traffic. In the latest presentations given at Small-cap conferences, Virtutone stated the average sale price per minute is .004$.

Calculations:

-          2M$ represents 75% max of  receivables

-          Max receivables are thus 2.67M$

-          Each minute sold has an average price of .004$

-          Max receivables of 2.67M$ thus represents 667 million minutes sold

-          Receivables are expected to be collected with 60 days

Normally receivables are collected  in 30 – 60 days, which means the bank agreement is telling us the expected volume lies between 333 to 667 million minutes per month.

Profitability:

Although Virtutone has not publicly stipulated its gross margin on each minute sold, we know from historical financial statements that the average gross margin is about 50%. A very conservative investor could cut this figure in half, and estimate 25% gross on the above revenues.

Taking 25% profits from 2.67M$ of receivables equates to 668k net. Now these are receivables which we estimate to be for 30-60 day collection period. 60 days is the conservative figure, or  a 2 month period. This means Virtutone could generate (668k every 2 months  x 6 = 4M$ of net earnings per year) for the Wholesale division alone. All gross margin from the Wholesale division flows to the bottom line because Virtutone was already profitable without this division, as the Cash Store contract allowed them to surpass the breakeven  point,  proven  in the latest (6) profitable quarters.

Stock price:

In terms of stock price impact, 4M$ of net earnings divided by 19.2M shares outstanding translates into 0.21$/share. Using a price earnings ratio of 10 times earnings, we obtain 2.10$ per share, but the company has already been named Top Growth Company of the Year by Branham 300 ( http://www.marketwire.com/press-release/virtutone-ranks-1-on-branham300s-top-10-growth-companies-for-2011-tsx-venture-vfx-1648599.htm ), which warrants a much higher PE ratio. Needless to say, Virtutone will probably not be a penny stock  much longer if management can deliver on the above expectations.

The above is simply my personal understanding and not to be construed as investment advice. I’m not a broker, director, manager or employee of the aforementioned company, just a shareholder. Some typos could have occurred, do your own due diligence.