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VISN: Pump And Dump 101

|Includes:VisionChina Media, Inc. (VISN)

VisionChina Media (NASDAQ:VISN), "one of China's largest out-of-home digital television advertising networks on mass transportation systems"


Unlike many other Chinese companies, VISN did not go the RTO route, and did proceed with a traditional IPO in late 2007. This was not, however, free of a number of issues, which are outlined nicely in the following article, and which I will not re-hash in this post.

VISN stock has collapsed since the IPO, as their business continues to be unprofitable and cash flow negative, and the company was forced to do a 20:1 reverse split to stay listed on the NASDAQ in December 2012.

As recently as early September, the stock was below $2 per share, or under 10 cents per share unadjusted for the reverse split. Volume was extremely light and the stock was seemingly destined to fade into obscurity.

That all changed in early October, and since then, the stock has been up over 300% to hit a high of $7.87, all the while on the highest volume in its history.

This move has come on absolutely no incremental news and is similar to exaggerated moves in a number of other Chinese small cap names.

It is my belief that the current price action is nothing more than a typical small-cap pump and dump scheme.

Reasons why the Company is likely insolvent and worth $0:

1) They are operating cash flow negative and have been for several years, with no discernible signs of a turnaround.

Consistently Unprofitable and Cash Flow Negative
All figures in $millions 2012 2011 2010
Net Income ($246) ($13) ($151)
Cash From Operations ($27) ($18) ($22)

2) Management has a history of botching acquisitions with disastrous results for shareholders. The company has written off ~$325 million in goodwill since 2010, which is over 10x the current market cap of the company. Skeptical investors would be well-served to question whether or not this suggests that acquisition prices have been artificially inflated. In the most benign scenario, the sheer scale of the goodwill write-offs confirms the ineptitude of management.

You can read all about the goodwill impairments in the Company's most recent 20-F, filed on May 30, 2013 (1 month after the filing deadline, I might add).

Here is a cut and paste from the document:

"We incurred net loss attributable to our shareholders of US$ 246.4 million in 2012, US$12.5 million in 2011 and US$151.3 million in 2010, respectively. The net loss attributable to our shareholders in 2012 and 2010 was primarily due to non-cash impairment charges totaling US$178.8 million and US$145.7 million we recorded in 2012 and 2010, respectively, as a result of the write-off of goodwill and intangible assets in connection with three out of six advertising agency businesses we acquired in 2008 and Digital Media Group we acquired in January 2010."

3) The company is involved in litigation and has been ordered by a court in New York to pay over $70 million, which it does not have. This lawsuit once again relates to the Company's Digital Media Group acquisition. Text directly from the 6-K issued by the company in September:

"On July 26, 2013 the Clerk of the Trial Court entered judgment in favor of the Selling Shareholders pursuant to the July 15, 2013 order, directing that they shall recover from VisionChina the sum of $71,800,047.46 and have execution thereof (the "New York Judgment")."

If you believe VISN's financial statements, as of June 30, 2013, they had a total of $40 million in cash. In Q2, they burned through $7 million in cash for operations, not to mention the cash they need to invest in the business.

At the current pace, VISN stands to run out of cash within the next five quarters, and this is before factoring in the over $70 million legal liability that the company is responsible for.

Bottom Line:

Like many Chinese small cap companies, VISN has a dubious operating history, a complicated VIE corporate structure, and a number of red flags scattered throughout their financials and SEC filings.

The fundamentals of their business in China continue to be weak, they continue to burn through cash, and have massive legal exposure that the company appears to be unable to pay with current resources.

That leaves it with several options, none of which are favorable to shareholders.

I believe there is absolutely no fundamental reason for the explosion in the VISN stock price and that the current price action is nothing more than a pump and dump.

The underlying state of their business it summarized best by the company itself in their 20-F:

"We incurred recurring loss and experienced negative cash flow of operations; these conditions raise substantial doubt as to our ability to continue as a going concern."

Should investors be paying a 300% premium for a company with a long history of mismanagement, a consistent inability to generate cashflow and profits, and exposure to a judgment 2x its market cap? I don't think so

Disclosure: I am short VISN.

Stocks: VISN