Description

Through most of 2009, SNA traded between $0.05 and $0.10. But recently the stock price rose rapidly, trading as high as $0.55. The Company has never been profitable and revenues are de minimis. The Company seems particularly good at issuing stock and press releases. A number of questionable press releases seem to be inflating the stock price, despite a lack of fundamentals and the accelerating dilution caused by continued stock issuances. I believe that reality will soon be reflected in the stock price.

Company overview: SNA is a technology company focused on "providing Aerospace Solutions - both hardware and software platforms - to assist aviation operators worldwide". SNA claims to have developed STAR-ISMS, an in-flight safety monitoring system - a system that combines in-flight data monitoring and diagnostics with a real-time, secure satellite connection between aircraft and the ground. SNA was founded in 2000 and listed on the TSXV in 2002. I believe the Company has not successfully sold and installed a working model of its core STAR-ISMS product. The Company has never been profitable or FCF. Expenses have been reduced recently as the Company appears to be facing a cash crunch.  (All numbers are in thousands of Canadian dollars.)

Stock issuances: SNA issues dilutive stock in order to fund the annual CFO outflow. Approximately 77m units (shares plus warrants struck slightly higher) have been issued since May 2008 at prices as low as $0.06 per share. These shares are issued in private placements where the broker receives ~10% commission. In addition, SNA routinely applies to the regulator to extend the term of outstanding warrants. Moreover, in Q409 the Company issued 1m shares to settle patent litigation by its former president Hilary Vieira.  This constant stock issuance appears to be a pyramid scheme used to fund current expenditures. SNA has a diluted share count of ~172M, with ~162m shares out and ~52m shares out struck at an average price of $0.22. 

Press releases under scrutiny: To support the stock issuance, management issues press releases that imply future sales or strategic/technical partnerships, but these do not actually lead to revenue. In 2008, the Company was requested by the TSX Venture Exchange to formally redact or amend many of its previous statements regarding sales, partnerships or memoranda of understanding (MOU) including:

• $17m of revenue from SpiceJet, Air Sahara and AR Airways
• An MOU with TAP in Portugal and Kharkov State Aircraft Manufacturing Company in Ukraine
• Sales to Bexair
• A technical assistance contract for the Indian Air Force Round World Glider Expedition
• A MOU with Air Arabia
• A MOU with a medical monitoring project
• An installation for Ethiad Airways
• Sales to Zain Aviation
• A MOU with an industry leading electronic flight bag supplier

These press releases find their way into various stock forums (such as Agoracom.com and Stockhouse.com), and also on certain sites touting microcaps in the guise of independent research, though with the disclaimer, "this is an advertisement for Star Navigation Systems Group Ltd. The purpose of this advertisement, like any advertising, is to provide coverage and awareness."
- http://www.allpennystocks.com/aps_ca/company_spotlights/archives/sna.asp         

The tone on these sites is promotional, but not more so than management (this is a CEO interview paid for by SNA).
- http://www.investmentpitch.com/media/587/Star_Navigation_Systems_Group_-_TSX.V_SNA/

IR firm faces fraud allegations: SNA's IR firm, Agoracom, is facing fraud allegations by the OSC. This in itself suggests little but it should nonetheless be considered that SNA's stock price could have benefited from Agoracom's alleged actions. The OSC alleges that Agoracom's employees tried to drive up share prices in microcaps it represents by creating aliases to post more than 24,000 messages. Fake postings were allegedly designed "to create a misleading appearance of greater interest and trading activity in the securities of Agoracom's clients to induce clients to contract or continue to contract with Agoracom and increase the value of Agoracom's stock option". Agoracom charges clients a monthly fee and receives stock options. As recently as January 2010, SNA renewed its contract with Agoracom for one year for a cost of $3k and 600k options.
- http://www.vancouversun.com/cites+investor+relations+firm+phoney+postings/2767926/story.html
- http://www.osc.gov.on.ca/documents/en/Proceedings-SOA/soa_20100401_agoracom.pdf

Research also reveals a number of questionable aspects of the Company:

• From March 2006 through the beginning of 2010, SNA repeatedly touted testing successes and installations with Pakistan International Airlines (PIA). Conversations with PIA, however, confirm that although two such tests were carried out in 2007-08, SNA was not able to demonstrate the implied cost savings and certain functionality. PIA has not signed a contract with SNA.
• In November 2007, SNA announced the sale of 50 units to Indus Airways. Indus Airways is non-operational and the sales were never consummated.
• SNA has sold a total of 36 units of its STAR-ISMS Lite product to Skylink Aviation for its operations in Afghanistan. Conversations with Skylink confirm that the prime utility of the system is simple tracking and non-automated text messaging rather than advanced avionics. These are not sales of SNA's core STAR-ISMS product. I believe SNA has not successfully sold and installed a working model of its core STAR-ISMS product.

Risk: On April 6, 2010, SNA announced the signing of a technical partnership agreement with Astrium (a subsidiary of EADS). No detail is available beyond the press release. I believe the outcome of this press release will be similar to previous releases. If I were to argue the potential bull case, it is might be possible that Astrium (or another EADS division) could somehow integrate the SNA technology in to its own products and sell SNA's product. However, SNA's track record, the lack of any SNA announcement from Astrium and the fact that there is not even a mention of SNA on Astrium's site suggests such an outcome is unlikely. I have tried unsuccessfully to reach Astrium.

Conclusion: SNA's stock price is benefiting primarily from stock promotion and the stock will soon return to single digit cents.

Disclaimer: This write-up is not a recommendation to purchase or sell SNA. Please do your own due diligence. 

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