Priority One Jets - Set To Soar?
Jun. 2, 2015 10:29 AM ET | 2 comments | About: Priority Aviation, Inc. (PJET)
Disclosure: The author is long PJET. (More...)
Summary
•Priority One Jets is a nano-cap company worthy of careful due diligence.
•Many nano-cap companies report vague, inadequate filings so they can pretend to be viable businesses, not so for Priority One Jets.
•Operations are profitable, but caveats remain.
I was reluctant to review the prospects for a public company that trades in penny valuations. Investors can view such analyses with a jaundiced eye, perhaps justifiably so, given the level of risk assigned. However, after doing my homework and speaking to company representatives, I can state without reservation that Priority One Jets (OTCPK:PJET) stands out among its cohort, for two reasons:
1- It is a real business, a fully functioning operation with a strong revenue base ($1.75M Gross Revenue last quarter) and current, thorough filings.
2 - New management has taken their SEC reporting from non-existent to fully transparent in remarkable fashion. One would be hard-pressed to find a micro-cap company that presents financial reports with the depth and scope which Priority One has presented. While many nano-cap companies are purposely vague, Priority One is happy to be open and honest.
The Company
Priority One Jets (Priority Aviation, Inc) is a full-service private jet sales and chartering service operating from new office space in lower Manhattan, NYC. They have a satellite office in Los Angeles as well.
The company services high net-worth individuals and corporate clients accustomed to secure traveling in luxury aircraft. Priority One does not own the planes, but tracks a global network of owners and charterers in order to maintain a broad variety of aircraft available to their clients on short notice, with the amenities they demand. It's the type of business that requires strong personalities to run successfully. Attention to detail, alacrity, aviation/airport knowledge, timeliness and service must be delivered or a client book can quickly disintegrate.
I had the opportunity to speak with a director from Priority One, who illuminated key areas of the company's filings and explained the nuances of booking, charters and high-end air travel. This type of access to industry pros is rare in micro-cap companies, whose board, if it even exists, would rather not be so open with details about operations and financials. The insight I'm sharing here is noteworthy, since so many companies in this space are opaque at best.
Briefly
Peter Minikes was hired as CEO in November, 2013, bringing his Wall Street background and extensive customer book into the fold. Prior to his appointment as CEO, Mr. Minikes worked in the financial services industry and also in the thoroughbred breeding and racing industry, where he undoubtedly developed some of his contacts. The contact/client list, or book, as it is referred to in charter parlance, is critical. This is a network business, both for the operators and the clients. Reputation matters in a sector with no real moat to speak of. Anyone can open up a web site and claim they are in the business of booking private jets, but quickly discover they are lacking the two key elements Priority One brings to the game-capital and clients.
Capital is required to pre-book charter flights or hold sales until the client pays their bills. No company wants to tell a client they can't book a flight because they lack the access to the credit necessary to hold it. Priority One has cash and credit lines, so doesn't suffer from a lack of credibility in their industry.
Although the book is important, new clients obviously help the business grow more quickly. One of the first orders of business for Mr. Minikes, from an operational standpoint, was to bring costs down, particularly advertising.
The company had been throwing money at the web and hoping some of it would magically find customers; money out the window. This is a select clientele. Priority One now has a focused and less costly program in place to find that affluent customer, with targeted ads in carefully chosen spaces.
Priority One went public through a reverse merger, not the path current management would have taken, but one they intend to clear. Mr. Minikes is an active manager, who hired new attorneys and new accountants to deal with the mess left by prior management after the merger with NuMobile and subsequent listing. Thus far, it's difficult to argue with their success. The company just reported strong revenue and plenty of cash on hand. Though the stock boasts a small batch of outstanding shares, it appears unlikely the company will need to come to the capital markets for a secondary to fund expansion, since cash on hand is increasing quarter over quarter and is sufficient to run the show.
The Downside
The risk for investors lies within the capital structure, not in the operation of the company. There is an anvil dangling over the financials which, if cut loose, could crush the stock in the near term. Prior management and early investors, hold over two-million dollars worth of convertible debt.
In December of 2013, the company executed a (1 for 1,000) reverse split, decreasing the number of authorized shares from six billion to two-hundred fifty million. If all two-million dollars of debt converted, the company, after issuing the stock due from the conversion of debt and notes, would have more than 1.02 billion shares outstanding.
Deconstructing - The Q1 Report states, in part, "On December 13, 2013 the Company entered into an Agreement and Plan of Merger and Reorganization ("Agreement") with PJET. Following the merger the Company's common stock was issued to owners of PJET. This resulted in the prior owners of PJET owning the equivalent to 86.6% of our total issued and outstanding stock after issuance."
This is the crux of the convertible debt problem. Priority One's current management is proactive and, I'm told, "very aggressively negotiating with holders of this debt."
In keeping with Priority's pattern of transparency, the company has painstakingly detailed the convertible debt issuance in the notes attached to their latest filing. A snapshot of this note is posted here with the next level of detail found in the filing.
(click to enlarge)
Source: Priority One Jets Q1-15 Filing
The company is working vigorously on its capital structure. There are limits on its dilution-only two-hundred fifty million shares authorized. The company could file a certificate and authorize more shares, but that option is objectionable to the CEO and the Board.
Valuation
The company reported 68,967,710 weighted shares outstanding as of March 31, 2015. Some interesting numbers:
March 31, 2015
December 31, 2014
Cash & Equivalents
$393,981
$186,552
Total Current Assets
$521,598
$356,884
Total Current Liabilities
$18,004,181
$18,489,346
Three Months Ended March 31
2015
2014
Revenues
$1,756,116
$1,764,357
Cost of Sales
$1,340,999
$1,551,616
Gross Profit
$415,117
$212,741
Note: Current liabilities includes convertible notes and derivative liabilities. This figure, ex those items, is $251,689.
Source: Priority One SEC filings.
As a service business, the company does not run high, regular operating costs. It's business is fairly straightforward and therefore, relatively simple to value based on information provided in the filing. As stated, the debt situation accounts for a massive discount applied to the valuation, due to the risk of dilution.
I worked through a rudimentary discount cash flow model to test the market-applied discount at which the stock is currently trading. I used a five-year projection with a 5% growth rate for each year and a 10% discount rate. I based my cash flow on numbers from the current filing: $186,552 cash at the beginning of period and $207,429 at the end of the period. With those numbers as a starting point, I extrapolated them out for the current year, then forward through five years on an annual basis.
To apply the ten-percent interest rate I multiplied the projected cash flow of years one through five by .9 / .83 / .75 / .68 and .62 respectively. I arrived at a total of $3,311,271 which, when divided by the current outstanding shares (68,967,710) resulted in a valuation of $0.048.
I then divided the $3,311,271 by 1,210,252,687-the total common shares which would be issued if all convertibles and preferred shares were converted to outstanding shares (Q1-15, Note 5, Derivative Liability) and arrived at .0027, which is within .0001 of the closing price of PJET as of this writing.
So my model, though somewhat arbitrary, was not far off. It seems the market has arrived at the current valuation in consideration of this convertible debt overhang. Should this overhang recede as negotiations proceed in Priority's favor, the benefit to patient shareholders could be substantial.
Near term, the a worst-case scenario must be weighed against the best, with grades of satisfaction in between. The conclusion to this issue is complex because of the number of note holders involved and the lack of a clear-cut end date. What's likely to happen is what generally happens in life; some will swing one way and some the other, predicated on whatever the debt holders or their advisors see as being in their best interest. So we wait.
Meantime, Priority One is a viable, profitable, well-run company with the capacity to expand its revenue base through consolidation and targeted advertising without the need for large capital expenditures.
The director told me, "this company is trading nowhere near value because it is one of the very few micro-cap companies with a real business. The last thing that's holding it back is management's ability to get the debt reorganized."
These types of negotiations can be contentious, often leading to suits and counter claims, however, I believe the right team is in place, leading a fundamentally sound and profitable company. If all were to go well for this team, this entry point is a rare opportunity.
Is the growth rate in my model too generous? Perhaps, but consider how the company can grow at negligible cost to shareholders.
Consider that their board comprises experienced Wall Street and aviation professionals.
Consider that the company has almost $400K in cash. They do not need to go to the capital markets to fund asset purchases or pay down operating debt to banks and other creditors; they have none.
Options for Growth
The company can acquire new books and revenues through various types of consolidation. I stated earlier this is a business one can start with a laptop and a small budget. By bringing on individual players with little or no access to the capital required to build their business, Priority One would effectively absorb the smaller player along with their book. This type of arrangement increases cash flow with minimal administrative expense.
Though it would require a sizable capital outlay, Priority One could purchase aircraft and hold them for charter. There are tax advantages to this but it's a big step that probably means going to the banks or capital markets for funding. However, should they go this route, the board has sufficient contacts and aviation experience to broker a deal for the aircraft that benefits shareholders as well as the company.
Their advertising strategy involves careful placement of ads to target their demographic and the company, in keeping with a savvy tech approach, may at some point develop an app to expedite service, though it's not a priority. It was explained to me that many of these trips are one-off, but more important, when a client is booking a twenty-five thousand dollar trip, on a particular aircraft, with familiar specifications and favored amenities, he or she does not want to deal with an app. Customers in this market expect personal service.
Conclusion
Obviously you can't invest with a blind eye to the convertibles issue, but once resolved, assuming the resolution is good for the company, this will be a lucrative investment. To get in at these levels borders on incredible, but you must, must, enter into an investment such as this with your mind open to the possibility that the negotiations could fail and the outstanding shares will surpass a billion. The convertible debt is the 800-lb gorilla, but said primate, one hopes, is open to compromise.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
