Vimicro (VIMC): Numerous Red Flags Make This A Strong Sell
VIMC’s share price has risen over 200% because of misleading press releases.
VIMC management has $.19 options which vest in the coming weeks.
VIMC management has been registering millions of dollars worth of stock to sell.
Numerous other red flags covered in the article.
Vimicro (NASDAQ:VIMC) is a Chinese company that produces video surveillance technology and products. It is not a particularly good company, yet it's stock price has risen over 250% in the last month alone. VIMC IPO'd in 2005 offering 8.7 million shares at $10/ share in an offering lead by Morgan Stanley. I believe that there are some red flags that investors could be potentially ignoring.
A Revolving Door of CFOs
VIMC has seen an alarmingly high level of turnover at the CFO position, and some of these CFOs have been involved with questionable companies in the past.
In the past three years no CFO has stayed longer than 12 months and the company went an entire year without a CFO from April 2013 to April 2014. Turnover of that level should alarm investors. Digging deeper into the past of these CFOs reveals some interesting background. Take for example Mr. Wu. In the press release announcing his introduction as CFO the company gave a brief biography.
Mr. Wu is an experienced corporate finance and management professional, with nearly 20 years' experience working with leading multinational and local Chinese companies in China in technology and other sectors. Before joining Vimicro, he worked as China Managing Director at Dragon Bay Capital, a China-focused management consulting firm. He had also served as CFO positions in several companies, including China Natural Gas, China Medicine Corporation and AlliancePharm US LLC, as well as a Senior Finance Manager at Motorola, Inc. He earned an MBA from the Wharton School of the University of Pennsylvania and a Master of Arts in Criminal Justice from Indiana University.
In the 2011 20-F they left out a few positions that they mentioned in the press release
Peidong (Richard) Wu joined our company in 2011 as our chief financial officer. Mr. Wu is an experienced corporate finance and management professional, with nearly twenty years' experience working with leading multinational and local Chinese companies in China in technology and other sectors. From 2006 to 2011, Mr. Wu worked as China Managing Director at Dragon Bay Capital, a China-focused management consulting firm. He has also served as chief financial officer and china managing director at The AlliancePharm US LLC from 2000 to 2006. Mr. Wu received his MBA from the Wharton School of the University of Pennsylvania and a M.A. degree in Criminal Justice from Indiana University.
In the 20-F there was no mention of his role as CFO of China Natural Gas and China Medicine Corporation. Perhaps it was because they were attempting to hide the fact that both companies were zeros. China Natural Gas was first of fraud accused by Alfred Little in May 2010. Two years later the SEC brought charges of fraud against China Natural Gas, charges which were eventually settled in 2013. In the case of China Medicine Corporation the stock now trades at $.01/ share after its accountant resigned and the company said its financial statements from 2008-2010 were unreliable. BigClassAction.com provides an overview:
On February 22, 2011, China Medicine issued a press release announcing that Frazer, LLP, the Company's accountant, would be declining to stand for reappointment. On the news, the Company's stock lost more than 40% of its value from February 23, 2010 to March 23, 2011.
Then on March 23, 2011, China Medicine filed a Form 8-K with the Securities and Exchange Commission ("SEC") announcing that its board of directors (the "Board") had concluded that the Company's financial statements filed with the SEC for the 2008 and 2009 fiscal years and the quarterly reports during the fiscals years 2008, 2009 and 2010 were unreliable. China Medicine also disclosed that certain accounting and reporting errors were identified with respect to improper activities by certain employees at the Company's subsidiaries. The Company purportedly intends to restate the previously issued financial statements and has withdrawn its application for a NASDAQ listing. In reaction to the news, on the next trading day, China Medicine's stock dropped by over 53% from $1.16 per share on March 23, 2011 to $0.54 per share on March 24, 2011 on heavy volume.
On July 8, 2011, the Company announced that its earlier financial statements for the 2006 and 2007 fiscal years were also considered materially unreliable. In reaction, China Medicine's stock lost 10% closing at $0.72 per share down from $0.80 per share on July 8, 2011.
Just six months after this restatement Mr. Wu joined VIMC taking the role of CFO. Perhaps Mr. Tang's record is better? The 2012 20-F gives Mr. Tang's bio.
David Tang rejoined our company in 2012 as our chief financial officer and was appointed to the position of chief strategy officer in April 2013. Mr. Tang is in charge of investment, investor relations and strategic business development activities. He is an experienced financial professional with extensive experience on investments. Most recently, Mr. Tang was active as an investor and as a managing partner of iFirst Capital LLC, a Shenzhen-based VC/PE firm. Before that, Mr. Tang served as Vice President and Chief Financial Officer of Vimicro from July 2008 to November 2010. Prior to that, he served as the Chief Financial Officer of CNinsure Inc. a NASDAQ listed company operating in China, and before that, Mr. Tang served as the Chief Financial Officer of IRICO Group and Chinasoft International, both Hong Kong-listed companies. Prior to those positions, he worked as an equity research analyst at Merrill Lynch & Co. in New York. Mr. Tang received an MBA degree from the Stern School of Business, New York University
While Mr. Tang certainly has a cleaner record than the previous CFO, it is not without blemish. His previous role as CFO of CNinsure had issues, although no where near the level of the issues Mr. Wu had. CNinsure was the subject of a $19/ share buyout offer but the deal fell through after accusations of irregularities in the sales incentive program of the company. After Mr. Tang left the company in April 2013 the VIMC had no CFO for the next year, so during that time there is no CFO that was involved with previous failures. Current CFO Peter Li appears to be the only CFO in the last four years that has not had any issues in previous roles. He was previously the CFO of Hollysys Automation and Yucheng Technologies. Yucheng Technolgies went private at $3.88/ share in October 2012 and Hollysys trades on the NASDAQ with a market cap of $1.2B.
Auditor Issues???
While a high level of CFO turnover is surely something of note, it does not by itself mean anything. A recent press release announced that Grant Thornton was replacing Ernst & Young as VIMC's auditor. I found this interesting because I had not seen any press release announcing that Ernst & Young was resigning as auditor. That is likely because while the press release announcing the auditor change appears on the NASDAQ website, it does not appear on VIMC's website under the rest of their press releases. While the press release contained the usual "the split was amicable" type language, it did have another interesting nugget of information. At the bottom of the press release, under "About Grant Thortnton" was the following information:
Grant Thornton, China firm of Grant Thornton International, is headquartered in Beijing, with approximately 150 partners and 3,000 professionals in 19 offices in China. Grant Thornton offers a full range of services including assurance, tax, advisory, asset valuation and project cost management. Grant Thornton serves a broad client base that encompasses more than 140 public companies and over 2,000 state owned enterprises(SOEs) and privately held businesses, as well as foreign-invested enterprises, including US-listed companies such as Yanzhou Coal Mining Co., Ltd. (NYSE:YZC), e-Future Information Technology Inc (Nasdaq:EFUT), China Finance Online Co., Ltd. (NASDAQ:JRJC), etc., and HK-listed companies such as Brilliance China Automotive Holdings Ltd. (1114.HK), SINOPEC Engineering (Group) Co., Limited (02386.HK), Geely Automobile Holdings Ltd. (0175.HK), Yanzhou Coal Mining Co., Ltd. (1171.HK), etc..
I noticed immediately the companies that Grant and Thornton had audited. Being familiar with JRJC and having published negatively on it recently I was curious what the other companies were. While YRZ is a $5B market cap mining company, EFUT is a $16M market cap online company that has had little success. JRJC recently went on a run up similar to what VIMC is doing now. For those unfamiliar with the story JRJC announced a joint venture, the stock went parabolic, but has crashed over 30% in the last 5 days when earnings were released and those that had bought into the hyped up growth story were disappointed. It is interesting that JRJC and EFUT were two of the companies listed in the auditors description, likely implying that those are the largest US listed companies that they audit. If VIMC was rapidly growing why would they be trading down auditors like they just did?
VIMC's Competitors
These are just a few of the competitors that VIMC lists in its 20-F:
Ali Corp
EMPIA Technology
Sonix Technology
Sunplus Technology
Texas Instruments
HiSilicon Technologies
Ambarella
Sony
Samsung
NXP Semiconductors
Interestingly enough none of those companies even mention VIMC as one of their competitors, odd since VIMC describes itself as a "leading video processor and video surveillance provider." But that should not be the main takeaway. Instead it is interesting to note how much better funded its competitors are and how much more they spend on R&D. In 2013 VIMC spent just $11 million in R&D. Here's what it's competitors that had readily available filings spent on R&D:
Company 2013 R&D Spend
It's unclear how VIMC can compete with these companies given its miniscule R&D spend compared to its competitors.
Sneaky Insider Selling?
While the share price has been shooting up, insiders have been registering shares to sell via Form 144's. Below is a screen shot of the registrations to sell shares from Bloomberg. Each of the Form 144's is a registration to sell shares.
Here are some of the Form 144s.
For example VIMC co-founder, President, and COO Zhaowei Jin has registered over $1.3 million worth of stock to be sold.
Here is the amount of shares registered to be sold by Chief Controller Jinming Deng.
(All Form 144's from Bloomberg)
VIMC Doesn't Own All Of The Entity Mentioned In Recent Press Release
A recent press release said that VIMC had gotten a had won a contract worth $12M. The press release read:
Vimicro International Corporation ("Vimicro" or the "Company"), a leading video surveillance technology and solution provider in China, today announced that its joint venture, Shanxi Zhongtianxin Science and Technology Co. Ltd. ("Zhongtianxin"), has won a contract to provide SVAC-compliant video surveillance cameras and system to the Traffic Police Detachment of Taiyuan for RMB76 million, or USD12.4 million approximately. The project is expected to be completed by early 2015.
"We are pleased to have won this contract to supply our SVAC-compliant video surveillance products and system to the Taffic Police Detachment of Taiyuan, following our successful implementation of Phase I of Tiawang," commented Dr. John Deng, Vimicro's Chairman and CEO. "This contract win validates further adoption of SVAC national video surveillance standard from public security video surveillance system to local traffic control monitoring in Shanxi Province. As the only proven provider of SVAC technology and solutions in the marketplace, Vimicro will continue to leverage its first-mover advantages to capitalize on the megatrend of SVAC national standard adoption by the government, to further establish itself as a leading player in China's video surveillance market."
Peter Li, CFO of Vimicro, commented, "In the meantime, we have won the competitive bidding of Phase II Tiawang for Taiyuan City of Shangxi Province, which will be announced at future due time."
Nowhere in the press release do they mention that they just have a 50% ownership stake in the JV that won the contract.
Additionally, Zhongtianxin is a related party which was respnsible for almost ⅓ of VIMC's total revenue. Again from the 20-F:
In September 2012, we established Zhongtianxin with Guoxin Group and VMF Consulting Company (a related party entity controlled by Zhonghan (John) Deng and Zhaowei (Kevin) Jin, who are members of our management team and managed by Xiaodong (DAVE) Yang, who acted as our director until May 2012) to focus on our surveillance business. Guoxin Group and VMF Consulting Company agreed to make cash contributions of RMB98 million and RMB4 million, respectively, to Zhongtianxin. In addition, Vimicro China agreed to make a cash contribution of RMB26 million and provide certain intellectual property, appraised at RMB72 million by an independent third-party valuation firm, as part of its investment in Zhongtianxin. As of December 31, 2013, these amounts had been paid in full.Our investment in Zhongtianxin is accounted for using the equity method as Guoxin Group may exercise substantive participating rights in accordance with the constitutive documents of Zhongtianxin.
In 2013, our sales to Zhongtianxin totaled $21.3 million. This amount primarily consisted of the sales of inventories from Vimicro Tianjin and Vimicro Fuzhou to Zhongtianxin to carry out its surveillance projects in Taiyuan and Baoding. We also purchased inventory from Zhongtianxin in the amount of $3.7 million. In addition, as of December 31, 2013, the amount due to us from Zhongtianxin totaled $19.4 million. This outstanding amount primarily consisted of accounts receivable. As of December 31, 2013, we had an amount due to Zhongtianxin of $6.8 million which was related to prepayments made to vendors by Zhongtianxin on behalf of our company.
More importantly VIMC's revenue from related parties has been increasing rapidly, which could mean that some of the revenue is coming from uneconomic transactions.
Source: 20-F
Additionally, VIMC has an incredibly high DSO (days sales outstanding)
Source: Bloomberg
This combined with the increase in revenue from related parties could suggest that the company is struggling to collect its account receivables from related parties.
Options Vesting
VIMC management has options at $.19 that will vest in a few weeks. These options were granted as part of the 2004 Share Option Plan. These options were re-priced in 2008 because the stock price had fallen so much that management no longer believed it was enough to incentivize management.
Source: 20-F
Conclusion
A massive run up in the stock price right before options vest, misleading press releases, hidden registration of shares to sell by management, increasing revenue from related parties. This is just another stock that has been over-hyped and pumped on misleading news. It will end the same way the countless others have.
Note: I have contacted IR with several questions raised in this article but have not yet received a response.