velocity data initial nov 2015 - baystreet · siddharth rajeev, b.tech, mba, cfa analyst november...

Siddharth Rajeev, B.Tech, MBA, CFA Analyst

November 9, 2015

2015 Fundamental Research Corp. “10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Velocity Data Inc. (CSE: VCT / FSE: 9VD / DB: 9VD) – Initiating Coverage - Entering the Cyber

Security Market

Sector/Industry: Data Security vit.technology

Market Data (as of November 9, 2015)

Current Price C$0.025

Fair Value C$0.20

Rating* BUY

Risk* 3 (Average)

52 Week Range C$0.015 - C$0.18

Shares O/S 113,605,577

Market Cap C$2.84 mm

Current Yield N/A

P/E (forward) N/A

P/B N/A

YoY Return -86.8%

YoY TSXV -30.6% *see back of report for rating and risk definitions *All the figures are in US$ unless otherwise specified

Highlights

• Velocity Data Inc. (“company”, “Velocity”) is entering the rapidly growing cyber security market. Increasing cyber-attacks, and the growing importance of data protection, are prompting government entities and private businesses to allocate significant resources into cyber security.

• Velocity’s proprietary platform, known as T.A.S.C, offers applications (“apps”) focused on mobile device protection, anti-theft, private browsing, etc. The company made a soft launch of T.A.S.C in April 2015, and is currently planning an aggressive marketing campaign to build brand awareness and attract users.

• The company is also an established Information Technology (“IT”) product reseller with over 26 years of track record. Primary clientele include major US defense contractors. As a reseller, the company generated $41 million in revenues with a gross margin of 5.8% in the 12 months ended October 31, 2014.

• The company went public through a reverse takeover in July 2014.

• Management team anticipates positioning the company as an acquisition target.

• We are initiating coverage with a BUY rating and a fair value estimate of C$0.20 per share.

Risks

• The cyber security market is highly competitive, and is currently dominated by large players.

• The company has yet to start generating revenues from T.A.S.C.

• Working capital was negative at the end of Q3-2015.

• The liquidity of Velocity’s shares is not high at this time. Management intends to list the shares on the TSXV exchange shortly.

Key Financial Data (FYE - Oct 31)

(C $) 2011 2012 2013 2014 2015E 2016E

Cash 431,612 649,657 440,528 1,026,125 2,534,052 2,486,276

Working Capital 822,099 845,877 870,661 (1,772,931) (2,520,403) (2,536,372)

Total Assets 4,216,336 4,355,582 4,281,042 5,864,346 7,742,858 7,974,803

LT Debt to Capital 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Revenues 26,739,410 32,124,369 34,014,946 41,025,641 43,871,837 46,915,490

Net Income 6,809 21,730 27,943 (469,919) (1,406,656) (251,709)



Background

History of ACL

Velocity Data Inc. is a cyber security solutions provider and an IT product reseller, headquartered in Maryland, U.S. The company was formed in 1989 as ACL Computers and Software (“ACL”). ACL is a reseller of computer hardware, software and peripherals primarily to U.S. defense contractors and federal government end-users. Up until 2014, ACL was a private corporation with less than 10 employees. In February 2014, the current management acquired ACL from its sole owner (name undisclosed) for $2.50 million, $2.25 million of which was paid in cash, and the rest by issuance of 6% p.a. notes. The

current CEO, Adam Radly, and the CFO, Bob Bates, have extensive background in

private equity and M&A in the IT space. On July 22, 2014, management completed a reverse take-over of a Vancouver, Canada based shell company (known as GTO Resources Inc.) and took ACL public. ACL’s shareholders received 72 million common shares at $0.05 per share through the transaction, implying a valuation of $3.60 million. The company’s shares are currently trading on the Canadian Stock Exchange under the symbol VCT, and on the Frankfurt Stock Exchange under the symbol 9VD. Management intends to get the shares listed

on the TSX Venture exchange by early 2016. Velocity has a long track record as a reseller and its clientele includes major U.S. Defense contractors such as Lockheed Martin (NYSE: LMT), NASA, Northrop Grumman (NYSE: NOC), Boeing (NYSE: BA), etc. Velocity also has partnerships with brand-name suppliers such as Apple (NASDAQ: AAPL), Cisco (NASDAQ: CSCO), Dell, Intel (NASDAQ: INTC), HP (NYSE: HPQ), McAfee, Microsoft (NASDAQ: MSFT), etc. The company is one of only 50 authorized Tier 1 government resellers of Apple products. As a move to diversify its business model, in September 2015, the company launched its proprietary cyber security platform, named T.A.S.C, which offers apps focused on mobile device protection primarily targeting small businesses. The company is currently planning an aggressive marketing campaign to build brand awareness and attract users. ACL is a wholly owned subsidiary of Velocity Data, and as an ISO (International Organization of Standardization) certified reseller, is focused on purchasing IT products directly from manufacturers or their distributors, and reselling the products to U.S. defense contractors and government end-users. ACL procures its products from over 400 vendors, including elite suppliers such as Apple, Cisco, Dell, IBM, etc. Their offices are located in Marriottsville, Maryland, USA, with approximately 20 employees. The location is strategic due to its close proximity to major government facilities in Maryland, Washington D.C. and Virginia. All of ACL’s revenues are generated in the U.S. at this time. One of the key drivers of ACL’s business is the U.S. Federal Government’s mandate to offer at least 23% of their total contracts to small businesses. As a result, larger contractors are obligated to sub-contract a portion of their prime contracts to small businesses. In

2013, the Federal Government met its annual 23% goal for small business



contracting, resulting in over $83 billion of revenues for small businesses. The U.S. Federal IT budget is currently estimated at approximately $79 billion. Therefore, at least $19 billion of the total budget will be allocated to small businesses such as ACL. ACL had generated revenues of $41 million in FY2014 (12 months ended October 31, 2014), with a gross margin of 5.8%. Unlike distributors, resellers such as ACL use drop shipping, and rarely hold products in inventory. This, we believe, is a major advantage for resellers as they rarely have cash tied up in inventory. In 2014, ACL’s accounts receivable days was 32, and the payable days was 36, implying a negative cash conversion cycle. ACL’s sales orders vary in size ranging from multi-year contracts, to blanket purchase orders and individual orders. ACL typically obtains business from defense contractors through a contract bidding process. One of their key strengths is the long-term relationships they have with prime contractors. This is evident from the recognition ACL has received from their noteworthy business partners (listed below). � Recognized by Lockheed Martin as an “Outstanding Small Business Provider 2006”,

in March 2007. � Received the “Boeing 2010 Performance Award Gold Level” for superior supplier

performance. ACL was one of only 141 firms to achieve the Gold Level recognition. � Received the “Boeing 2011 Performance Award Gold Level” for superior supplier

performance. ACL was one of only 122 firms to achieve the Gold Level recognition. � Received the “Boeing 2013 Performance Award Gold Level” for superior supplier

performance. � Nominated by Lockheed Martin for the 2014 “Bridging the Gap Achievement Award”.

According to management, Lockheed Martin and Apple account for approximately

20% each of Velocity’s revenues at this time.

One of ACL’s primary revenue drivers is their strong relationship with Apple. ACL received their “Tier 1 Government Resellers” designation in 2013, and now is one of only 50 firms allowed to resell Apple products to the US federal government. As a result, ACL’s revenues from Apple products grew from $0.75 million in 2011, to $8 million in 2014. ACL management estimates that Apple products will continue be a key revenue driver for them going forward. They estimate that Apple’s penetration rate, which is currently low in the government sector, is expected to rise going forward. Management

states that ACL is now one of the top 10 Tier 1 Government Resellers of Apple by

volume.

Overall, we believe that ACL has built a strong track record as a reseller with established relationships with the major players in the space. Their track record allows for stable and



T.A.S.C

recurring business from their clients. Going forward, management intends to grow this division organically and through acquisitions. ACL’s primary challenge, as mentioned earlier, is that its business is highly dependent on the federal government’s mandate to large contractors to sub-contract to small businesses. Any unfavorable changes in the government’s mandate may negatively impact ACL’s business. As a move to diversify its business model from a pure reseller, in 2014, management made a decision to enter the rapidly growing cyber security space, which is discussed in the following section. In September 2015, Velocity launched its proprietary cyber security platform T.A.S.C (The Art & Science of Cybersecurity - https://tasclabs.net/). T.A.S.C is basically a cyber security dashboard that allows its users to remotely activate various apps centered on mobile device protection. Velocity’s goal is to develop apps offering services in the following broad areas: � Data Storage: customized storage system to fit customers’ needs.

� Data Protection: protection from accidental data deletion, data corruption, or ad hoc

data recovery requests. � Information Security: solutions to protect customer from any data loss due to security

breach, human error, or theft. � Cloud Computation: customized cloud system solutions to allow clients efficient

management of their IT resources.

Source: Velocity Data



Competition

T.A.S.C.’s current apps include: � Anti theft: offers device tracking in the case of loss or theft. Tracking can be done

remotely from any computer and allows the user to remotely lock, access the device’s camera, reset and sound alarms. This app has worldwide reach.

� Private Browsing: allows users to navigate the internet on their own terms- blocking scripts, flash, and allowing the use of proxies whilst surfing the web.

� Private Communications: allows users to encrypt their private texts, calls and chats

so that they are communicated securely and safe from outside eyes. � Safe Connect: allows users protection of their privacy when near public hot-spots,

stopping others from seeing the networks that users have connected to. This app also has the added benefit of not affecting the device’s battery life.

Various other apps such as File Shredder, Data Safe and Anti Spam are under development for future release. T.A.S.C is currently marketed in North America to small businesses, and is supported on Android devices. As of Q2-2015, Android accounted for 82.8% of the global smartphone market. In the future, Velocity plans to expand their coverage to iOS (13.9%) and the Windows (2.6%) platforms. T.A.S.C.’s revenue model is to charge users a monthly subscription fee. Pricing and other details are yet to be finalized. Our discussions with management indicated that at this time, they have started offering subscriptions to potential users on a trial basis. The cyber security market, although relatively young, is highly competitive. We believe Velocity faces stiff opposition from the larger players in the space. The following section lists a few key players.

Cheetah Mobile Inc (NYSE: CMCM, Market Cap: $2.84 billion): Cheetah Mobile Inc., based in China, is a leading applications developer with a strong focus on data security. Cheetah’s core products include “Clean Master”, “Battery Doctor”, “CM Security”, and “Duba Anti Virus”. Most of these products cover the three main platforms – Android, iOS, and Windows. This company currently has over 340 million monthly active users. In the last 12 months, Cheetah Mobile reported $412 million in revenues and net income of $20 million.

AVG Technologies (NYSE: AVG, Market Cap: $1.25 billion): Founded in 1991, AVG Technologies is a company based in Amsterdam that is focused on internet and mobile security. One of their key products is the AVG Antivirus (including features such as anti-theft). AVG uses a subscription model for its AVG Antivirus Software, offering a 1 year subscription for a user for C$39.99. The company covers various platforms, such as PC, Mac, and Android. In the last 12 months, AVG reported $403 million in revenues and net



Market

Outlook

income of $43 million.

Qihoo 360 technology (NYSE: QIHU, Market Cap: $7.22 billion): Qihoo 360 is a company based in China that offers internet and mobile security products. As of June 2015, according to their website, the company had 514 million monthly active PC internet users and close to 800 million mobile users. Qihoo 360 offers various products, such as 360 Mobile Safe, 360 Antivirus, and 360 Safeguard. The company’s revenues come from online advertising and internet value-added services, with most of their products being offered free of charge. In 2014, Qihoo 360 reported $671 million in revenues and net income of $98 million.

Avast: Avast Software is a private company providing security software and products to retail customers and businesses. It has a large customer base and has provided data protection for over 230 million people, devices and businesses. Avast reported 2014 revenues of $217 million representing 51% YOY growth, with $154 million in EBITDA.

Although the market is dominated by large players, it is still in its early stages and we believe there is room for smaller players such as Velocity if they are successful in gaining traction. It is early to speculate the probability of T.A.S.C’s success. Management of Velocity believes that none of the competitors offer the same suite of apps as T.A.S.C.

They believe their strongest competitive advantage is their long-standing relationships

with Boeing and Lockheed, who due to their status as government contractors, take

cyber security very seriously.

The global cyber security market is estimated to grow at a compounded annual growth rate of 9.8% from 2015 to 2020 to $170 billion by 2020. The market growth is expected to remain strong due to the rising risk of cyber attacks. As internet technology is constantly developing, avenues of attack available to cyber criminals are increasing. Global government spending on data security has also been increasing in response to increases in cyber crime. (Source: data provided by Cybersecurity Ventures - a research firm focused on the cyber security market).

Lloyds Bank estimates that cyber attacks cost business globally up to $400 billion a

year, with other sources postulating that the figure is in excess of $500 billion. Banks and financial services firms have been the top target of cyber attacks, with telecom, defense and energy falling close behind. With such vital industries at risk, significant increases in spending are required to protect the sensitive information being targeted. Furthermore, the types of cyber-crime that are perpetrated are varied and exceptionally difficult to identify and resist. For example, it is estimated that, in 2014, up to 16 million mobile devices were infected with “malware” (generic term for hostile software). Increasing cyber attacks have resulted in a significant increase in the global cyber insurance market from $1 billion in 2013 to $2.5 billion in 2015. According to PwC, the cyber insurance market is expected to increase to $5 billion by 2018.

The chart below shows the increasing number of incidents reported to the U.S. Computer Emergency Readiness Team (CERT), an organization within the Department of Homeland



Security dedicated to addressing cyber security threats.

Source: Market Research Media

The threat of cyber-crime became headline news when Sony Entertainment Pictures (TYO: 6758) saw their confidential information and data being released against their will by unidentified hackers. The U.S. Federal Bureau of Investigation’s cyber security division testified to the U.S. senate that the attack levelled against Sony was strong enough to make it past 90% of the internet defenses in the private industry.

The increasing popularity of BYOD (bring your own device) policies at several large corporations and institutions has increased the risk of cyber crime. This is because these devices are either unprotected or poorly protected and allows cyber attackers easy access to corporate resources. This is a major issue as it is estimated that there will be over a

billion employee owned smartphones and tablets in the workplace by 2018 (Source:

Juniper Research).

In addition to mobile security, the global demand for other services that Velocity Data offers through their T.A.S.C software is on the rise, especially with regard to features like data encryption and network security. With regards to data encryption, it is expected that by the end of 2015, approximately 20% of proprietary data in the cloud will be encrypted. By 2018, this percentage is expected to grow to 80%. (Source: data provided by Cybersecurity Ventures)

This rapidly expanding market is seeing revenues come mostly from North American and European contributors, with the Asia Pacific region emerging as a potential market for cyber security solution providers. India, for example, is estimated to see its market for



cyber security rise to $1 billion in 2015 - a 100% increase from 2014. The table below includes estimates of the value and share of the cyber security market by region (not including North America).

Region 2019 Forecasted Value 2013-2019 CAGR

Europe $35.53 Billion 7.20%

Middle East & Africa $13.43 Billion 13.70%

Asia Pacific $32.95 Billion 14.10%

Latin America $11.91 Billion 17.60%

Source: Cyber Security Ventures

The U.S. is the largest market for cyber security providers, as well as the main market that Velocity initially caters to. The U.S. is expected to have spent $52 billion on cyber security in 2015, and this figure is expected to continue to increase.

Source: TIA

Canadians have also seen the level of cyber-crime rise to increasingly higher levels as new ways of perpetrating cyber crime are developed. A study in 2014 by the Ponemon Institute found that 36% of Canadians had been exposed to at least one cyber attack in that year alone. Also, in the event of data loss, 66% of Canadian IT professionals expressed that they were not confident that all data could be recovered. Also, fraudulent purchases and identity theft have also seen a sharp increase in recent years (see chart below).



Source: Globe and Mail

The cyber security market has seen several M&A transactions this year, as shown in the table below.

Acquirer Acquired Company Deal Value

AVG Technologies Privax $40 million paid up front, $20 million in cash a year later

Baidu Anquanbao Undisclosed

Blue Coat Systems Perspecsys Undisclosed

Check Point Software Technologies Lacoon Mobile Security "tens of millions" (some sources estimate $80 million)

Cisco OpenDNS $635 million

CounterTack Mantech Cyber Solutions Intl undisclosed

Elbit Systems Nice Systems Cyber Unit $117.9 million paid in cash, $40 million based on peformance

Fortinet Meru Networks Approximately $44 million

Global Defense and National Security Systems STG group $165.5 million, $75 million cash, $90519000 in equity

Microsoft Adallom $320 million

Salesforce.com Toopher $2.5 million in equity, 37408 shares from Sales force

Splunk Caspida $190 million, $127 million in cash, rest in restricted stock

Singtel Trustwave $810 million in cash

Raytheon Foreground Security undisclosed

Raytheon Websense $1.9 billion

Raytheon Blackbird Technologies $420 million

Bain Capital (Private Equity) Blue Coat Systems $2.4 billion



Management

In summary, we believe the market outlook is very positive for cyber security providers. If T.A.S.C is able to gain traction, we believe Velocity can easily position itself as a strong acquisition candidate. The next 12 months will be very crucial for the company as they try to penetrate the market and attract users to T.A.S.C.

Directors and executive officers of the company own 72 million shares, or 63% of the issued and outstanding common shares. The high equity ownership, we believe, is a positive sign as it aligns management and investors’ interests. Brief biographies of management, as provided by the company, follow:

Adam Radly, President and Chief Executive Officer

Adam Radly has been Chief Executive officer of Velocity Data, Inc. since 2013. Mr. Radly has extensive experience with public companies as a director and through a variety of officer positions held with various entities across different countries. Prior to Velocity, Mr. Radly was chairman and CEO of Inova Technology. He took over Inova and boosted revenue from $400,000 to $22 million between 2006-2013, through organic growth and acquisition. This included 3 acquisitions where each respective subsidiary experienced its best annual performance to date immediately following take over. Mr. Radly also founded ISIS Communications and served as its Chief Executive Officer, where he built revenue during its start-up phase to more than $20 million, and completing the company’s $100 million initial public offering and completing a merger with the company's largest competitor. Mr. Radly is also CEO of S7 Group limited, a firm focused on acquiring controlling interests in mid-market companies.

Robert (Bob) Bates, Director and Chief Financial Officer

Robert Bates has been Chief Financial Officer of Velocity Data Inc. since 2014. Currently, He is also the Chief Financial Officer of PIQ Technology. He previously served as the Chief Financial Officer of Inova Technology Inc. from 2006 to 2013 and the Chief Financial Officer of Catalyst Financial Group from 2009 to 2012. Mr. Bates has 25 years of experience as a Controller and Chief Financial Officer of various public and private entities in several countries, across various industries. He has had a key role in several IPO’s and reverse mergers, and currently oversees Velocity’s Compliance, M&A and Due Diligence. In addition to his Chief Financial Officer positions, he is also a director of Orion Financial Group.

Carlo Argila, Director

The appointment of Carlo Argila to the Company’s board of directors came in July 2015. Mr. Argila has over 20 years of marketing and advertising experience with several major advertising agencies. He managed client relationships for several notable brand names such as IBM, Motorola, Nokia, Verizon and American Express. He also has a commendable track record in the field of entrepreneurship, and has built various companies from the start up phase to acquisition. The company’s board of directors is comprised of three individuals, of which, only one is independent. We believe this is negative as we would have liked to see more independent board members.



Financials

The following chart summarizes the company’s performance history:

Revenues grew from $26.74 million in FY2011, to $41.03 million in FY2014, reflecting a CAGR of 15.3%. In the first nine months of FY2015, revenues were up 8.9% YOY, from $28.24 million to $30.76 million. Revenue growth since 2011 has come primarily from increased sales of Apple products. Our revenue forecast for FY2015 is $43.87 million,

and for FY2016, is $46.92 million.

The following table shows the margins. Margins 2011 2012 2013 2014 Q3-2014 Q3-2015 2014-9M 2015-9M

Gross 5.28% 5.77% 6.32% 5.77% 5.07% 5.00% 5.76% 5.01%

EBITDA 0.39% 0.16% 0.18% 0.85% 0.42% -2.41% 1.11% -1.70%

EBIT 0.35% 0.15% 0.17% 0.50% 0.42% -2.41% 1.11% -1.71%

EBT 0.05% 0.10% 0.12% -1.15% -1.59% -3.99% -0.32% -3.81%

Net 0.03% 0.07% 0.08% -1.15% -1.59% -3.99% -0.32% -3.81% Gross margins have ranged between 5% and 6.3% since 2011. In the first nine months of FY2015, gross margins were 5% versus 5.8% in the same period in the previous year. According to management, gross margins dropped because of supplier price increases and increased competition. General and Administrative (“G&A”) expenses were up by 57.6% YOY to $2.07 million in the first nine months of FY2015. This was primarily because of one-time financing costs and the development of T.A.S.C. Management estimates stabilized annual G&A

expenses to be approximately $2 million, which indicates break-even revenues of $35 -

$40 million. EBITDA was -$0.52 million in the first nine months of FY2015, versus $0.31 million in



the comparable period in the previous year. The company reported a net loss of $1.17 million (EPS: -$0.00) in the nine month period versus $0.09 million (EPS: -$0.00) in the comparable period in the previous year. Our net loss forecast for FY2015 is $1.41 million

(EPS: -$0.01), and for FY2016, is $0.25 million (EPS: -$0.00).

The following table shows a summary of the company's cash flows. Summary of Cash Flows 2012 2013 2014 2014 (9M) 2015 (9M)

Cash Flows from Operations 223,207 (204,129) 1,277,620 1,706,165 (1,273,720)

Cash Flows from Investing - - - (1,254,359) -

Cash Flows from Financing (5,163) (5,000) (692,023) (259,029) 2,156,114

Net Change 218,044 (209,129) 585,597 192,777 882,394

Free Cash Flows (Equity) 223,207 (204,129) 1,277,620 451,806 (1,273,720) The company reported -$1.27 million in cash flow from operations, and CAPEX of nil in the first nine months of FY2015. Our discussions with management indicated that they

expect to spend approximately $1 million towards marketing the T.A.S.C platform,

subject to capital availability.

At the end of Q3-2015, the company had $1.91 million in cash. Working capital and the current ratio were -$2.84 million, and 0.7x, respectively.

Liquidity Analysis 2011 2012 2013 2014 Q3-2015

Cash $431,612 $649,657 $440,528 $1,026,125 $1,908,519

Working Capital $822,099 $845,877 $870,661 -$1,772,931 -$2,837,419

Current Ratio 1.25 1.25 1.26 0.73 0.71

Debt / Capital 42.2% 42.0% 0.0% 138.5% 153.7%

LT Debt / Capital 0.0% 0.0% 0.0% 0.0% 0.0%

EBIT Interest Coverage Ratio 1.2 3.0 3.6 0.3 (1.5)

Activity Analysis 2011 2012 2013 2014 Q3-2015

Days Accounts Receivable 48.95 40.62 39.52 32.38 34.37

Days Inventory 1.02 0.54 0.17 0.63 0.65

Days Accouts Payable 37.57 32.07 34.97 35.76 38.67

Cash Conversion Cycle 12.41 9.09 4.72 (2.75) (3.65) Velocity has long-term debt to capital of 88% at the end of Q2-2015, much higher than its peers. The company arranged the following financings recently: Velocity uses third-party receivable financing to fund its working capital. The financier typically advances 85% of the net face amount of the company’s receivables in return for an interest fee of 1% per month, and a maintenance fee of 1.28% per year. At the end of Q3, approximately $4 million was due on this facility. The lender has a first position lien on all of the company’s assets. Stock options and warrants: At the end of Q3-2015, the company had 4.27 million



Valuation

Risks

options (average exercise price of $0.10), and nil warrants outstanding. None of the options/warrants are currently in the money. As the company has yet to start generating revenues from T.A.S.C, for conservatism, our valuation models only account for the potential cash flows from the reselling business. The following table shows a summary of our valuation. DCF Valuation

2015E 2016E 2017E 2018E 2019E 2020E Terminal

Funds Flow from Operations (adj.) 610,519 755,415 901,851 1,060,796 1,233,178 1,419,989

Change in Working Capital 69,836 (31,807) (5,701) (5,966) (6,242) (6,531)

Cash from Operations 680,356 723,608 896,149 1,054,830 1,226,936 1,413,458

CAPEX - - - - - -

Free Cash Flow 680,356 723,608 896,149 1,054,830 1,226,936 1,413,458

Present Value 680,356 666,920 761,239 825,835 885,326 940,014 17,603,898

Discount Rate (WACC) 8.50%

Terminal Growth 3.0%

Present Value (C$) $24,599,946

Cash - Debt (C$) -$3,294,896

Fair Value (C$) $21,305,050

Shares O/S (treasury stock method) 113,605,577

DCF Value / Share $0.19 The following key assumptions were used:

� Our models assume revenues to grow to $61 million by 2020, or a compounded annual growth rate of 6.9% from 2015 to 2020. The company’s revenue growth in the past three years was 15.3% p.a.

� Long-term gross margin estimate of 5.6%, which is the average of the past five years.

� Weighted average cost of capital of 8.5%; the consensus estimate for companies in the space is approximately 7%, to which we added a small-company risk premium of 1.5%.

We will start providing our projections for T.A.S.C once the platform starts to gain traction from users. Based on our estimates, we are initiating coverage with a BUY rating and a

fair value estimate of C$0.20 per share. We believe that the market is not assigning

value to the company’s new initiatives and investors at this level are getting the

potential upside from T.A.S.C. for free. The following risks, though not exhaustive, may cause our estimates to differ from actual results:

• The cyber security market is highly competitive, and is currently dominated by large players.

• The cyber security market is relatively new and companies in the sector have to adapt to technological changes.

• The company has yet to start generating revenues from T.A.S.C.



• Working capital was negative at the end of Q3-2015.

• The company may have to pursue equity financings, which may dilute existing shareholders.

• Interest rate risk associated with debt.

• The liquidity of Velocity’s shares is not high at this time. Management intends to list the shares on the TSXV exchange shortly.

We assign a risk rating of 3 (Average).



APPENDIX

STATEMENTS OF OPERATIONS

(in C$)- YE Oct 31st 2011 2012 2013 2014 2015E 2016E

Sales 26,739,410 32,124,369 34,014,946 41,025,641 43,871,837 46,915,490

Cost of Sales 25,327,557 30,271,335 31,866,152 38,659,578 41,678,245 44,275,758

Gross Profit 1,411,853 1,853,034 2,148,794 2,366,063 2,193,592 2,639,732

Expenses

Selling & Marketing 10,340

Stock based compensation

G & A 1,296,162 1,802,984 2,089,177 2,017,995 2,766,455 2,118,895

EBITDA 105,351 50,050 59,617 348,068 -572,863 520,837

Amortization 12,312 2,048 1,843 142,420 1,107 1,162

EBIT 93,039 48,002 57,774 205,648 -573,970 519,675

Interest & Bank Charges 80,453 15,805 15,855 675,567 832,686 771,384

EBT 12,586 32,197 41,919 -469,919 -1,406,656 -251,709

Exchange rate and Unusual items

EBT 12,586 32,197 41,919 -469,919 -1,406,656 -251,709

Income Taxes 5,777 10,467 13,976

Net Earnings for the period 6,809 21,730 27,943 -469,919 -1,406,656 -251,709

EPS 0.00 0.00 -0.01 -0.01 0.00



BALANCE SHEET

(in C$)- YE Oct 31st 2011 2012 2013 2014 2015E 2016E

Assets

Cash 431,612 649,657 440,528 1,026,125 2,534,052 2,486,276

Accounts receivable 3,586,346 3,564,118 3,802,539 3,475,320 3,846,298 4,113,139

Inventory 70,862 18,865 10,929 122,544 128,671 135,105

Related parties 8,769 6,243

Prepaid expenses 10,460 10,460 10,460 115,094 109,680 117,289

Current Assets 4,108,049 4,249,343 4,264,456 4,739,083 6,618,701 6,851,809

Property and equipment 108,287 106,239 16,586 1,125,263 1,124,156 1,122,994

Intangibles, net

Goodwill

Total Assets 4,216,336 4,355,582 4,281,042 5,864,346 7,742,858 7,974,803

Liabilities & Shareholders'

Equity

Accounts payables & accrued

liabilities2,606,811 2,713,015 3,393,795 4,180,578 3,996,544 4,245,621

Deferred income

Related parties 630 4,639 238,681 238,681 238,681

Loans payable/ borrowings 678,509 685,812 898,700 898,700

Secured borrowings 2,092,755 4,005,179 4,005,179

Current Liabilities 3,285,950 3,403,466 3,393,795 6,512,014 9,139,104 9,388,181

Loans payable

Shareholder's Equity

Share Capital 150,000 150,000 910,000 -154,996 -154,996 -154,996

Contributed surplus 658,078 892,655

Deficit 780,386 802,115 -22,753 -492,672 -1,899,328 -2,151,037

Total Liabilities &

Shareholders' Equity4,216,336 4,355,582 4,281,042 5,864,346 7,742,858 7,974,803



STATEMENTS OF CASH FLOWS

(in C$)- YE Oct 31st 2012 2013 2014 2015E 2016E

Operating Activities

Net earnings for the period 21,730 27,943 -469,919 -1,406,656 -251,709

Items not involving cash

Depreciation 2,048 1,843 1,659 1,107 1,162

Bad debt expense

Stock based compensation 658,078 234,577

Deferred income,accretion exp, int accrual, and

others 140,761

23,778 29,786 -327,499 -747,472 -15,969

Accounts Receivable 15,985 -232,178 327,219 -370,978 -266,841

Inventory 52,046 7,936 -111,615 -6,127 -6,434

Prepaid Expenses and other Current Assets -104,634 5,414 -7,609

Accounts payable and accrued Expenses 131,398 -9,673 1,494,149 -184,034 249,077

Changes in working capital 199,429 -233,915 1,605,119 -555,725 -31,807

Cash from (used in) operations 223,207 -204,129 1,277,620 -1,303,197 -47,776

Financing activities

Proceeds from secured borrowings, net 259,437 1,912,424

Proceeds from borrowings, net 898,700

Repayment of related party debt -5,163 -1,161,445

Capital Contributions 760,000

Divedends Paid -765,000

Warrants Exercised 209,985

Cash provided by financing activities -5,163 -5,000 -692,023 2,811,124 0

Investing activities

Goodwill

Cash used in investing activities 0 0 0 0 0

Increase (decrease) in cash 218,044 -209,129 585,597 1,507,927 -47,776

Cash beginning of period 431,613 649,657 440,528 1,026,125 2,534,052

Cash end of period 649,657 440,528 1,026,125 2,534,052 2,486,276



Fundamental Research Corp. Equity Rating Scale:

Buy – Annual expected rate of return exceeds 12% or the expected return is commensurate with risk Hold – Annual expected rate of return is between 5% and 12% Sell – Annual expected rate of return is below 5% or the expected return is not commensurate with risk Suspended or Rating N/A— Coverage and ratings suspended until more information can be obtained from the company regarding recent events. Fundamental Research Corp. Risk Rating Scale:

1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry. The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure is conservative with little or no debt. 2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash flows (though current free cash flow may be negative due to capital investment). The company’s capital structure is conservative with little to modest use of debt. 3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and coverage ratios are sufficient. 4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a turnaround situation. These companies should be considered speculative. 5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products. Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding. These stocks are considered highly speculative.

Disclaimers and Disclosure

The opinions expressed in this report are the true opinions of the analyst about this company and industry. Any “forward looking statements” are our best estimates and opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness. There is no guarantee that our forecasts will materialize. Actual results will likely vary. The analyst and Fundamental Research Corp. “FRC” does not own any shares of the subject company, does not make a market or offer shares for sale of the subject company, and does not have any investment banking business with the subject company. Fees were paid by VCT to FRC. The purpose of the fee is to subsidize the high costs of research and monitoring. FRC takes steps to ensure independence including setting fees in advance and utilizing analysts who must abide by CFA Institute Code of Ethics and Standards of Professional Conduct. Additionally, analysts may not trade in any security under coverage. Our full editorial control of all research, timing of release of the reports, and release of liability for negative reports are protected contractually. To further ensure independence, VCT has agreed to a minimum coverage term including four reports. Coverage cannot be unilaterally terminated. Distribution procedure: our reports are distributed first to our web-based subscribers on the date shown on this report then made available to delayed access users through various other channels for a limited time. The distribution of FRC’s ratings are as follows: BUY (69%), HOLD (8%), SELL (5%), SUSPEND (18%). To subscribe for real-time access to research, visit http://www.researchfrc.com/subscribe.php for subscription options. This report contains "forward looking" statements. Forward-looking statements regarding the Company and/or stock’s performance inherently involve risks and uncertainties that could cause actual results to differ from such forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company's products/services in the marketplace; acceptance in the marketplace of the Company's new product lines/services; competitive factors; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and other risks discussed in the Company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the various securities regulators. By making these forward looking statements, Fundamental Research Corp. and the analyst/author of this report undertakes no obligation to update these statements for revisions or changes after the date of this report. A report initiating coverage will most often be updated quarterly while a report issuing a rating may have no further or less frequent updates because the subject company is likely to be in earlier stages where nothing material may occur quarter to quarter. Fundamental Research Corp DOES NOT MAKE ANY WARRANTIES, EXPRESSED OR IMPLIED, AS TO RESULTS TO BE OBTAINED FROM USING THIS INFORMATION AND MAKES NO EXPRESS OR IMPLIED WARRANTIES OR FITNESS FOR A PARTICULAR USE. ANYONE USING THIS REPORT ASSUMES FULL RESPONSIBILITY FOR WHATEVER RESULTS THEY OBTAIN FROM WHATEVER USE THE INFORMATION WAS PUT TO. ALWAYS TALK TO YOUR FINANCIAL ADVISOR BEFORE YOU INVEST. WHETHER A STOCK SHOULD BE INCLUDED IN A PORTFOLIO DEPENDS ON ONE’S RISK TOLERANCE, OBJECTIVES, SITUATION, RETURN ON OTHER ASSETS, ETC. ONLY YOUR INVESTMENT ADVISOR WHO KNOWS YOUR UNIQUE CIRCUMSTANCES CAN MAKE A PROPER RECOMMENDATION AS TO THE MERIT OF ANY PARTICULAR SECURITY FOR INCLUSION IN YOUR PORTFOLIO. This REPORT is solely for informative purposes and is not a solicitation or an offer to buy or sell any security. It is not intended as being a complete description of the company, industry, securities or developments referred to in the material. Any forecasts contained in this report were independently prepared unless otherwise stated, and HAVE NOT BEEN endorsed by the Management of the company which is the subject of this report. Additional information is available upon request. THIS REPORT IS COPYRIGHT. YOU MAY NOT REDISTRIBUTE THIS REPORT WITHOUT OUR PERMISSION. Please give proper credit, including citing Fundamental Research Corp and/or the analyst, when quoting information from this report. The information contained in this report is intended to be viewed only in jurisdictions where it may be legally viewed and is not intended for use by any person or entity in any jurisdiction where such use would be contrary to local regulations or which would require any registration requirement within such jurisdiction.

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