The Microcap Speculator

Worth reading:

• Littlefield Corp. swings to a loss in Q1 - Quarterly earnings for Littlefield (LTFD.OB) came in a bit light. However, if it can pull off the sale of the catering business, this may still be a stock to watch.
• Banks.com, Inc. Adds Record Number of Registered Subscribers and Users During 2008 Tax Season: Financial News - Yahoo! Finance - Think of Banks.com (BNX) as a poor-man’s Marchex (MCHX) but with a little effort it could use Bankrate’s strategies to squeeze more cash flow from its domains
• Global Aircraft Solutions Announces Sale of One 737-200 Aircraft to Pamir Airways - GACF takes another step to improve its balance sheet, but the turnaround is far from complete.
• Onkyo Becomes Latest Microprocessor Patent Licensee - Another big CE name signs licenses the Moore Patent Portfolio, but these deals will never generate enough cash flow to please PTSC investors long term.
• Technical Communications Corporation Reports Results for the Second Fiscal Quarter Ended March 29, 2008 - TCCO rallied into the earnings report but sold off on the news. Though profits dipped a bit year over year, revenue growth was strong and backlog is impressive. Between existing backlog and the new Egypt contract, I highly doubt the dip is deep or prolonged.

DISCLOSURE: No positions.

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Global Aircraft Solutions (GACF.OB) announced disastrous preliminary fourth quarter and FY 2006 results, sending shares plummeting on huge volume. The severity of the reaction suggests that the announcement was unexpected. However, GACF also announced disappointing results last quarter, so today’s bombshell should not have come as a surprise.

My decision to stay long GACF in the wake of last quarter’s negative trend in revenues and earnings was a costly mistake. Now that I have paid the tuition to the market, my job is to learn as much as possible from this lesson. Here is my takeaway:

Company-specific:

1. The fundamentals in GACF are without doubt deteriorating. Do not presume a turnaround is imminent.
2. GACF management cannot be trusted. They suggested in no uncertain terms that key business was going to be pushed from Q3 into Q4, which should have boosted Q4. Now the company says that it will post a loss in Q4.
3. Beware of accounting issues. The company will delay filing its 10-K due to problems preparing accounting statements at partially-owned subsidiary JetGlobal. GACF says it has fixed the problem going forward. I’ve heard that song before.
4. Is there a collection problem with its biggest customer, Avolar? The company blames cash flow problems on growing receivables from Avolar. More details to come in 10-K.

General lessons:

1. when the fundamentals begin to deteriorate, don’t wait it out. The risk/reward ratio significantly worsens after the first negative announcement, and to assume a turnaround is hubris. In November 2006, I described last quarter’s results as “disappointing.” I should have exited then.
2. this position was in the red far before today’s beatdown. One of my personal trading weaknesses is showing too much patience to losers (and too little patience to big winners). I will consider structural approaches to overcome these tendencies. My first thought is implementing either a “time stop” or a once-per-month event where I kick my longest (and perhaps also my largest) losers to the curb. If you have used either approach or have any other ideas, shoot me an email.

DISCLOSURE: I am long GACF.OB, but plan to sell the position. Not a recommendation to buy or sell any security. For informational and educational purposes only.

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By any measure, Global Aircraft Solutions’ (GACF.OB)  third quarter report was disappointing. Revenue declined 22% from second quarter 2006 to $7.9 million, net profits before taxes declined 75% from the prior sequential quarter, and EBITDA slid 56% to $770,580. The only thing not dropping was expenses–capital expenditures for the quarter rose to $307,132 from $27,140 in the second quarter 2006.

Nonetheless, I am holding on to my shares for another quarter. The company gave investors every reason to believe it will close the year on a strong note:

• Four large maintenance checks scheduled for the third quarter were deferred into the fourth quarter by three separate customers: (1) a”C” check on an Avolar plane; (2) a maintenance check for a 737 in the Mexican presidential fleet; and (3)-(4) two “D” checks for BCI Aircraft Leasing. Avolar’s maintenance extension expires mid-November and the aircraft will be put into maintenance at Hamilton Aerospace immediately at that time. The Mexican Presidential fleet 737 was input for maintenance at Hamilton late in October, and last week, both BCI aircraft due “D” checks were delivered to the Hamilton facility.
• Collectively, these maintenance contracts represent over $2.9 million in anticipated revenue and over $435,000 in gross profit for Hamilton Aerospace and World Jet postponed to the fourth quarter.
• In the third quarter, the Company incurred a one-time interest charge of approximately $250,000 for a deposit made to a Middle Eastern national carrier in a bid to acquire eleven wide-body aircraft and associated spare parts.
• On November 17, 2006, the Company announced four additional maintenance, modification, and parts contracts valued at $4 million. President John Sawyer stated that the four contracts brought the company up to “full capacity.”
• GACF could be an unrecognized beneficiary of the US Air bid for Delta. According to the third quarter release, GACF’s 30%-owned subsidiary, JetGlobal, has filed a $51 million claim against Delta’s bankruptcy estate, joining a long line of unsecured creditors. By my calculations the part of that bid attributable to GACF is a little over $16 million. If the claim is not disputed, and US Air pays out 50 cents on the dollar as has been reported, then GACF could receive a windfall of up to $8 million (probably half in cash, half in US Air stock).

DISCLOSURE: I am long GACF.OB. I have no position in US Air or Delta. Not a recommendation to buy or sell any security. For informational and educational purposes only.

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Global Aircraft Solutions (GACF.OB) today published the transcript from its Q2 earnings conference call. All companies should do this. Its real simple–if companies care about their shareholders they will spend the miniscule amount necessary to get the call transcribed. Some will choose, as GACF did today, to file it as an attachment to an 8-K report with the SEC. Others will post the transcript on the website. Either way, shareholders benefit.

Highlights from the call:
Although our pre-tax earnings were down from the first quarter of 2006, we would have beaten the first quarter pre-tax profit number of 1.9 million with a profit of 2.13 million had we not incurred a one-time extraordinary expense of $686,000 due to an engine we sold being damaged during delivery. Global Aircraft was not responsible for the faulty delivery and insurance payments have been made for the full amount of the loss of $686,000. We expect to recover our loss, however, since there’s been no resolution of the claim as of yet, we were required by GAAP to book the entire amount as a loss.
****
JetGlobal has now placed 23 of the 26 aircraft that were acquired in September of 2005. Eleven of the aircraft have been sold and we started on April the 1^st, 2006 leasing 12 of the aircraft back to Delta for a period of time. And I would remind you that the bankruptcy court guarantees our payments from Delta and that upon the conclusion of the lease, JetGlobal will still retain ownership and be able to sell these 12 aircraft for an additional profit.
However, since our last conference call in May, Delta have returned six aircraft which we are now marketing and they have agreed to keep the remaining six until September the 29^th this year. Overall, this will generate $1.95 million to JetGlobal and $585,000 to Global less any expenses. We expect to sell and/or lease the bulk of the remaining aircraft by the end of the year excluding the six scheduled for return by Delta in September.
****
Well the initial — the initial — if you take the contract the 26 airplanes and what we’ve paid, we’re in each aircraft for about 860,000 a unit prior to receiving any of the rent. When you deduct the rent revenue if you take it across the 26 airplanes we’re in the aircraft for about 780 a piece.
****
We’re in all these assets for less than engine value. So what we would do is if for some reason we couldn’t move these aircraft we would — we could sell off the engines. The engines are — everybody is need of these type of motors every day. We chose not to go that route because we’ve had pretty good success moving them as full units.
****

Jay Brosnhan: John, how many aircrafts were sold this quarter? And is it feasible that with the interest out there that you’d be able to sell those 12 by the end of the year?

John Sawyer: Well we’ve sold six aircraft, but where we’re really looking at Jay is we’re trying to optimize instead of just, you know, getting a lesser cash value we’re getting a lot more activity from the leasing side of things and we feel that it can be a longer revenue stream for Global. We’ve got a lot of solid credits that are coming in Latin America, South America in particular, that are looking at wanting to take the aircraft for as long as 60 months. We’re also negotiating right now pretty strongly with Aloha and they’re looking at taking some of the aircrafts. So, I mean, we feel that — we really didn’t want to be maybe as much as we thought in the leasing business, but for long-term profitable gains for the company we’re looking at it might not be a bad idea to move six or eight of these into some type of long-term lease.

Ian Herman: And the reason for that Jay, you can recover your costs very quickly.

Jay Brosnhan: Sure and then retain the airplane and be able to sell it when it comes up.

Ian Herman: Yeah, you make profits on the lease itself and then you’ve still got the aircraft to sell at the end.

John Sawyer: And most of our leases would be structured where we’d pretty much be out of the aircraft, you know, within about nine months.

Jay Brosnhan: Oh very good. And on that…I’m sorry?

John Sawyer: So then you have 50 plus months of pretty much pure profit.

****

DISCLOSURE: I am long GACF.OB. Not a recommendation to buy or sell any security. For informational and educational purposes only.

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