Arecont Acquisition By Costar

By: John Honovich, Published on Jul 11, 2018

Arecont Vision acquisition by Costar [link no longer available] Technologies has been approved by the court, concluding the bankruptcy process triggered by Arecont's founders $80 million loan default, and winning the auction vs Turnspire.

But who is Costar? And what happens to Arecont now? Inside this note, based on feedback from Costar and Arecont, we examine these questions.

Acquisition *****

****** **** $**.** ******* in ****, ***** *****'* **** ***** documents:

**** ** ********** ****** than *** ******** $** million *** **** ********* had *******. ********* **** be **** * ******* fee, *** ***** ******.

************, ****** **** ****** liabilities ** ~$** *******:

Who ** ******?

[****: **** ******* ** copied **** *** **** last ****,**** ***** ** *** have ******* **** ****.]

****** ** * ******** traded *******, ******** ************* ** $** ******* vs* ****** ************** ****** $** *******. *** company ******** ******** *****, * ******-******* ***** surveillance ********,******, ** ********** ***** surveillance **************** ******** ** ****, *********** ********, ******* ****** ******* surveillance ************** ******** ** ****.

***** ******* ******* ****** Video *** ****** ** close, **** ****** ** made **** ******, ** the ******* ***** *****:

**** ***** ****** ****** and *&* ************ *** low, ** ************ **% and *.*%, ** ***** below:

******'* ******** ** ************ on ******* ******* ***** growing ******* ************, ********* to ******** **** ******** ************:

Future ** ******* ** ****** / **** *&*

****** *****, ** *** announcement, **** ** ***** strength ****** ** * 'real' ************:

** ******** ******’* ******** to ****** * ****** in *** ***** ************ industry, ************* **** * value-added *** ******* ******* to * ************* ***** and ****** *******. ***** with *** ***** ****** acquisitions, *** ******* *********** increases *** ************* *** design **** ************* **% to **% ** *** revenue.

********* ** ****, ****** emphasized **** **** ***** be ********** ********** ** Arecont's ******* *&*:

******* ** ********* ******** 8% ** ******* **** the ****** ********** ** staff. ***** *** *********** we ****** **** *** R&D ***** **** ******** to *** **-**% ***** as ** **** *** technical ********* ** ******** the *********** *** ******* of *** **** ******* line.

********** ****, ****** ***** their ******* ********** **** their **** ** ********:

**** ** ****** **-**% on *&* **** ********** spend **** **** **** as **** ********* ** house ******* *** *** developing *** ******* *** future ****** ********... ****** has ********** **-********** ***** product **** ***** *** acquisition.

Arecont ********** ******** ************

*******'* ********* **** ******** noted ** **** **** he *** ***** ******'* management *** **** **** 20 ***** *** **** the *********** *** ********** received, ****** ******'* "******* commitment ** ********* *** business **** *** ******, not **** *&* *** customer ******* *** ******* as ****."

Upside *** ******

******, ************** ****** (*** **** slip), ** * ********** small *******. ******, *******'* revenue **** **** *****, even ** ***** *******, was **** ******** **** than ******. *** ******, they ***** ********* ****** their ******* *******. ****, depending ** **** '*********' / **** ******* **** can **** **** ********* operations, ** ***** ******** Costar's *************. *** ***** the *** *********** *****, if **** **** ******* around *** ***** *** mistakes ** *******'* ********, they ***** *** ******* growth **** *******'* ******** state *********.

Challenges *** ******

*******, ***** *** ********* challenges *** ****** / Arecont *********:

*******: ***** ******'* ********** small **** *** ***** status **** ****** *** relatively ***** ***** ************ industry, *** **** ******* / ********* **** *** access ** **** ** a **** ******** *** likely **********.
***********: ******* ** *******, will **** ****** ********* and **** ** ******* cameras ** **** ** beat *** **** ** Axis, ********, *****, *********, etc.? **** *** **** 5 *****, *******'* ***** lead ** **** ****** resolution *** *****-****** ******* have ****** **** ********** or *** **** *************. What *** ****** / Arecont ** ** ******* this?
********:*******'* ***** ** *******, ** *** *** least. *******, ****** *** very ****** **** ***********. To **** ***, ******* will **** ****** **** to ****** ***** *****, which **** *** ** easy.
********* ****** *****: ** **** ** interesting ** *** *** much '*********' ***** ******* selling ****** ******'* *****. For *******, *** ******'* existing ****** ** ************** businesses **** ******* **** more *****-******* ** ***** verticals?

Vote / ****

Comments (30)

Undisclosed #1

07/11/18 11:58am

continue the development and support of the FPGA product line

Why in the world are they continuing with the FPGA approach? Given the various SoC options available today, they are re-inventing the wheel and carving it out of stone in sticking with FPGAs.

Continuing to support existing products is one thing, but sinking more development time and money into that architecture is a losing strategy.

John Honovich

IPVM | In reply to Undisclosed #1 | 07/11/18 12:05pm

Good question. I've asked them to share their case for FPGAs going forward. I am curious what they have to say because in the past it was an advantage but now?

John Honovich

IPVM | In reply to John Honovich | 07/11/18 01:37pm

Arecont, while noting that they cannot comment deeply on their roadmap, responded:

I will say that we are exploring the utilization of both FPGA and SoC separately as well as working in unison to leverage the advantages of both. Our future roadmap will continue to come out with differentiating products and solutions just as we historically have.

When asked for more specific benefits / applications, Arecont noted:

Think about the Integration of unique ISP algorithms as well as other special application algorithms or the Integration of visible, non-visible and other sensor types into a singular solution.

We will see what they do.

Note: the new Contera line uses 'regular' SoCs while the other / existing Arecont cameras use their FPGAs.

Undisclosed #1

In reply to John Honovich | 07/11/18 01:49pm

Think about the Integration of unique ISP algorithms as well as other special application algorithms or the Integration of visible, non-visible and other sensor types into a singular solution.

I have thought about it. So have Ambarella, HiSilicon, TI, Qualcomm, and several others. You don't need an FPGA, or really anything special to do that, there are several SoC's available, today, that you can build those kinds of products up from.

the new Contera line uses 'regular' SoCs

Right, but those are OEM/ODM units though? I did not get the impression that Arecont had any significant influence on the architecture design of any of their most recent hardware or software products in the Contera line.

Arecont should ask themselves why NOBODY(*) else is doing FPGA-based cameras.

*I don't care if some super-niche unheard of company is selling 1,000 FPGA-based units a year.

Undisclosed Manufacturer #2

07/11/18 12:43pm

I think that the concept has merit, but is there any actual evidence to support this architecture? Has there been a case of in the field re-programming that you couldn't do with a "standard" SoC with a firmware update?

Is the FPGA so flexible that they can use it for next-generation products, or do they need a newer chip, just like any other SoC-based product, increasing CPU, etc. with each generation?

Undisclosed Manufacturer #3

07/11/18 12:56pm

Didn’t Bosch add an FPGA to certain cameras for analytics?

Undisclosed Integrator #4

07/11/18 01:16pm

I don't know how much influence or involvement Karen Evans, President of Sielox and one of the Key Executives listed for Costar, will have with their new Arecont division. I've met her a few times and she always seemed very sharp, astute and hands on with her company and products. It's not uncommon for her to accompany and take lead on sales calls and answering technical discussions.

So that was the only the only reason I voted Positive- a very cautious and hopeful positive! Because yes they have a very long uphill battle ahead.

In the meantime, here's to Arestar!

Chalon Dilber

07/11/18 01:19pm

Never underestimate the Ultrak mafia! Really smart buy low and turn-around opportunity, just like Cohu. I hope Calderon is retained long term as he probably knows best where the bodies and efficiencies are buried at Arecont and he's a really good operator, like the team at Costar.

My only concern would be if the debt servicing (I'm assuming they didn't have ~$21M in cash since their market cap was only $13M) became a burden. But I haven't seen any news on the terms of financing for the Arecont purchase.

Undisclosed Integrator #4

In reply to Chalon Dilber | 07/11/18 02:21pm

Looks like either the market maker or someone at Costar might be trying to generate interest on the news.

CSTI stock movement

But they'll need more than 1000 shares to get on the daytrader's radar. But if they can get people on a speculation bandwagon, the boost to their capital worth would help offset the purchase and debt acquisition.

John Honovich

IPVM | In reply to Undisclosed Integrator #4 | 07/11/18 02:24pm

You should have bought last week when IPVM broke the news ;)

In all seriousness, we don't own take positions (long nor short) in any company we cover.

Also, as you allude, their stock has such low trading volume (no trades in more than a week until today), that it is pretty risky.

Undisclosed Integrator #4

In reply to John Honovich | 07/11/18 02:28pm

If I had had the funds available, I seriously would have, at least for a short term play. Hey, I would have been up by 6% now.

Undisclosed End User #7

In reply to John Honovich | 07/13/18 04:10pm

I did. Not a huge position, knowing the volume and risk involved, but interesting nonetheless. I'm a super green investor so don't tear me to shreds, but I thought Buying Costar before they acquired Arecont would be like getting in on the ground floor of an IPO, since they were previously a privately owned company.

John Honovich

IPVM | In reply to Undisclosed End User #7 | 07/13/18 04:19pm

I did. Not a huge position

Lol, probably less risky than Knightscope :)

To the extent that their revenue increases significantly, it could increase attention to Costar. And their valuation is very low, so there's certainly room for upside.

I don't have more knowledge or experience with stocks with such a low trading volume (i.e., most days no shares are traded). Anyone with anything to share about the liquidity risk of that?

Undisclosed End User #7

In reply to John Honovich | 07/16/18 03:16pm

Yes, probably less risky than Knightscope! LOL. I have had some interaction with their robots. They like to idle around parking lots like a grandma looking for a parking spot at the yarn store.

Costar do/did have a lot of eggs in one basket with the few large accounts they have (Walmart?). But I definitely see the opportunity to flip this business around.

CSTI is still trading pretty low volumes as always, but the price is up 20% this morning.

John Honovich

IPVM | In reply to Undisclosed End User #7 | 07/16/18 04:05pm

CSTI is still trading pretty low volumes as always, but the price is up 20% this morning.

You're right! Though only 300 shares have been traded:

John Honovich

IPVM | In reply to Chalon Dilber | 07/12/18 01:13pm

My only concern would be if the debt servicing (I'm assuming they didn't have ~$21M in cash since their market cap was only $13M) became a burden

Chalon, I asked Costar about this yesterday but have not received any response. I just emailed them again. It's a good question and a concern I noted in the original post. If I get a response, I'll add.

Chalon Dilber

In reply to John Honovich | 07/12/18 03:55pm

Thanks John,

On a related note, after ruffling through the investor relations pages a case can be made that this may be the continuation of a slow, multi-year roll-up play.

Why roll-up? The bios of their board members reads like they have a lot of experience with distressed assets, securities and creative financing. 3 excerpts:

...Vice President of Avenue Capital Group, a global investment firm, where he managed a portfolio of distressed securities, post-reorganization equities and other investments

...director of Barington/Hilco Acquisition Corp. (NASDAQ: BHAC), a blank check acquisition company.

...various positions in the mergers and acquisitions department at J. P. Morgan Chase & Co

Video surveillance focused, small, often boring, niche companies that are cash flow positive combined with turnaround opportunities for 'falling star', 'Made in the USA', brands (also smart at the beginning of a trade war!)

It will be exciting to see how they turn around Arecont and what steps they take next. Their presentation mentioned focus on video analytics but there is no intellectual property in any of their existing companies as far as I can tell; of course, there's no shortage of video analytics providers or 'distressed' video analytics providers for that matter. Fun topic to speculate on...

John Honovich

IPVM | In reply to Chalon Dilber | 07/12/18 04:08pm

Chalon, good points. I agree with you. In their 2017 investor presentation I cited in the article, it mentions their strategy of acquiring $5 - $10 million revenue annually.

Maybe they can make money off this but it risks becoming a frankenstein strategy. Buying loosely related companies and trying to patch them together, I don't know.

On the other hand, ACRE is doing something like this, but privately (which I think is better than being a OTC pink slip), with a lot more money and already with a big win (buying / selling Mercury).

John Honovich

IPVM | In reply to Chalon Dilber | 07/12/18 10:39pm

Costar responds to the debt servicing / financing question:

We made the purchase via financing through UMB Bank, though we just did not release the specifics yet. We do have a history of making acquisitions through bank financing and utilizing our positive cash flow from operations to not only pay down any bank debt, but also make investments in the organization. We anticipate utilizing the same strategy for this acquisition.

Undisclosed #8

In reply to Chalon Dilber | 07/16/18 03:54pm

Best thing to do would be to dump useless blowhards like Calderon and the rest of the management team. The company failed under his leadership why keep him.

He should go into politics where here can sit around and do nothing also and collect a check.

John Honovich

IPVM | In reply to Undisclosed #8 | 07/16/18 04:03pm

He should go into politics where here can sit around and do nothing also and collect a check.

So Hikvision?

Undisclosed #5

IPVMU Certified | 07/11/18 02:56pm

Now that they’ve hit the reset button, perhaps they can add one as well...

John Honovich

IPVM | In reply to Undisclosed #5 | 07/11/18 03:04pm

And the new Contera ones do have a reset button:

Undisclosed Manufacturer #6

07/11/18 05:56pm

Have there been any mentions of whether or not this acquisition will affect Arecont's new relationship with OpenEye for their VMS? Seems that Costar might benefit greatly from that aspect of things, as well, but I just wasn't sure how OpenEye might feel about it.

Undisclosed Integrator #4

07/16/18 05:50pm

Just came across and old email from 2012 where Arecont support was blaming the "pink hue" we kept getting on some of the sensors of the AV8185 on probably a "glitch in the VMS software". Which most everybody knows is was probably stuck IR filters very common with those models.

Undisclosed #10

In reply to Undisclosed Integrator #4 | 07/24/18 09:08pm

I will forever know Arecont for their images becoming a kaleidoscope of color, flapping between completely black and completely white, and delivering fewer frames per second than desired/advertised. The best way to ruin my day is to ask me to solve an Arecont camera problem.

John Honovich

IPVM | 07/24/18 05:44pm

Costar / Arecont webinar recorded + presentation slides. I only watched a little bit so far but wanted to include this on the post.

Undisclosed Manufacturer #11

In reply to John Honovich | 07/25/18 12:54am

Read through the entire presentation. Was unable to identify one single innovative thought or idea on any of the slides. Pity.

John Honovich

IPVM | In reply to Undisclosed Manufacturer #11 | 07/25/18 01:01am

They bought out a company in Chapter 11, perhaps your expectations are too high?

Undisclosed Integrator #4

In reply to Undisclosed Manufacturer #11 | 07/25/18 12:48pm

In their defense they just got the company so for the short term they may just be trying to put on the appearance of activity things are going along as normal until they finalize a plan for utilizing this new asset of theirs. Hopefully.

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