Violin Memory Inc (OTCMKTS:VMEM) just filed for Chapter 11, and has been delisted to trade over the counter (OTC). The company has suffered an incredible decline over the last three years, and currently trades for a market capitalization of just $1.33 million and a PPS of $0.055. In September 2013, the company traded for a little over $30 a share. That’s a 99.8% decline in 36 months.
The situation is now that the company can’t generate fresh revenues (for reasons we’ll get in to shortly) and – as a result – can’t appreciate in value in its current state. That’s why its PPS is down so low, and why sentiment is so weak.
What about the current shareholders, however? Or what about the potential for a quick profit on a bankruptcy trade? Is there anything there? Let’s take a look.
We’ll kick things off with an introduction to the company.
Violin Memory credits itself as being the creator of the flash storage system. This is a bit of a self promotional sound bite, but there’s some credence to it. The company was one of the first in a wave of its type, and at one time, was a leader in the space. The core innovation that lends credence to the above claim is rooted in something called Erase Hiding. It basically speeds up the ability of the technology to read data, even when part of the data is being erased. In the previous iteration of flash storage, this data would need to be erased, then rewritten, before it could be read. This, of course, slowed the read process down. With the ability to simultaneously erase data and facilitate a read, response time is dramatically increased. This is a patented technology, with the patents owned in their entirety by Violin, and no other company offers Erase Hiding as part of their flash product portfolio.
The problem is, however, the company’s sales team (and, probably to a higher degree, management) haven’t been able to perform against their own expectations. Sales started off strong, but have since weakened, and the company has found itself in a sort of downward spiral. It needs a large sales team to serve larger customers, but it can’t expand its sales team because it’s got no cash, and it’s got no cash because it can’t bring in the large customers (and in turn, the large revenues) that would add to its balance sheet.
Adding to this spiral is the fact that the company now cannot pick up new customers, because it needs to be able to assure these customers that it’s going to be able to service its storage offerings once the clients have transferred their data to Violin technology. With an uncertain future, it can make no such assumption, and potential new clients recognize this.
So, things don’t look great, but what about the above questions? Is there any upside?
Well, the only way that Violin is going to go forward as a functioning entity is if it sells itself to a larger operation. This would enable it to start expanding its base, and the increased impact of a larger sales force should allow it to start – finally – making good non its potential. The thing is, there’s value here. The value is rooted in the patents that allow for Erase Hiding, and there is any number of companies that could fold this technology into its own product offerings. It all comes down to what value the acquiring entity will place on these patents, and whether we think this value is higher than the current market capitalization and balance sheet consideration.
We think it is. The ability to offer a unique speed enhancing facility in the flash storage space is enough of a differentiator in a sales pitch to snag clients in a competitive landscape, and the flash storage space is growing (and becoming more competitive) by the day. The bankruptcy adds an element of uncertainty to the future of the current outstanding shares, but for a risk tolerant trader, picking up an exposure to the patent sale at the current price, on the assumption that the patents in question are worth more than the company’s current valuation, could be a nice short term play.
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Disclosure: We have no position in VMEM and have not been compensated for this article.