Hedge Funds Are Targeting Dialogic
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Dialogic (NASDAQ: DLGC)
(This write-up is an edited and greatly-abbreviated pitch pulled from the SumZero community.)
Recommended Action: Short
Current Price: $0.94 Target Price: $0.00
Source: Hedge Fund. New York, NY
Dialogic Inc. is a provider of communications platforms and technology that enable developers and service providers to build and deploy applications without concern for the complexities of the communication medium or network.
The company is struggling with an accelerating decline in sales of its legacy products, a slow ramp in new products, and a high cost structure. Furthermore, the company is facing an unresolved and costly SEC investigation, and has unremedied breaches of its internal controls. However, the highest hurdle facing the company is its burdensome debt load, which is due to mature in early January 2012 and may ultimately cripple the company.
The accelerating decline in legacy products and slow adoption of NextGen products has put Dialogic in a precarious position. The company currently has $109m of debt outstanding at an average interest rate of 14%, a shrinking cash balance, and is not in compliance with any of its key bank covenants.
What’s most troubling is that the company’s senior lenders for its revolving credit facility and term loan can accelerate the maturity of the debt early next year starting on January 6, 2012. And yet it does not appear that Dialogic has enough cash or assets to continue servicing its debt in the long-run, or pay back its lenders.
On March 28, 2011, the Company received a letter from the SEC stating that they were conducting an informal inquiry and requesting that the company preserve certain categories of records. In a follow up discussion with the SEC on March 30, 2011, the SEC informed the company that the inquiry related to allegations of improper revenue recognition and potential Foreign Corrupt Practices Act violations of the former Veraz Networks Inc. business during periods prior to completion of its business combination with Dialogic Corporation.
The company is cooperating fully with the SEC Inquiry and intends to continue to do so. As of its last quarterly filing, the company could not determine the probability of or quantify the amount of any fines or penalties associated with the SEC matters discussed above. However, the company has taken charges totaling $2.5m related to the SEC inquiry through its income statement in the general and administrative line. This represents yet another strain on the company’s rapidly depleting cash.
The survival of Dialogic will depend significantly on an unexpected stabilization in the decline of their legacy products, and material pick up in NextGen product sales. Otherwise, Dialogic will struggle under the weight of its high cost structure and significant debt load. Given the pending debt acceleration timetable for early January 2012, rapid decline in its cash and meager cash flow ability, the company appears to have limited breathing room.
Absent a significant and highly dilutive equity raise in the near-term, or debt restructure, the common stock of Dialogic will be rendered worthless.
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