Two GPT's Report Earnings: Avoca (AVOA) and Bactolac Pharmaceutical (BTCP)

It's back to off-the-beaten path research this week, the kind that has made this site either very original, or painfully irrelevant depending on your point of view. (We won't be mentioning the Fed, Bernanke, subprime, commercial paper conduits, or any of the other more common themes currently being beaten to death in the financial media these days.)

We will disclose recent earnings for two pink sheet companies Avoca, and Bactolac Pharmaceutical (formerly Advanced Neutraceuticals). In recent years, both of these companies went through the process of reducing their shareholder roles below 300 through a reverse stock split. This allowed them to delist, avoid SEC filing and Sarbanes Oxley, eliminating the prohibitive costs associated with each.

Disclaimer
Before we go any further it is important for readers to understand that Avoca and Bactolac are not liquid, in fact they rarely trade. As a result of the reverse splits, each company has less than 9,000 shares outstanding, and very wide bid/ask spreads:

So why write about them? We have followed these companies since before they delisted,(please search the site for previous research) and find the notion of companies effectively going "dark", yet still trading, to be fascinating. We believe that some of these situations can offer opportunity and may have a place in certain investor's portfolios. We took positions in both companies prior to their reverse splits, when liquidity was greater, and spreads were not as wide.

Keep in mind that despite the fact that neither of these companies is required to file financials with the SEC, both continue to update their shareholders; Avoca on a quarterly basis, and Bactolac less frequently.

Bactolac Pharmaceutical (BTCP)
Shares Out: 8613
Bid/Ask: $1350/$1700
Mkt Cap(bid): $11.6 million
Book Value/share: $2478
Tangible Book Value/share: $1600

For the six months ended 3/31/07 (they did not isolate quarterly results) sales rose 26% to $15.6 million. However costs rose as well, and operating margins dropped from 15.8% to 10.4%. The company cited higher material and production costs, higher quality control expenses, and customer resistance to price increases for the margin pressure. Net income was $835,000 or $96.95 per share, down from $117.79. Net margins fell from 8.2% to 5.3%.

One of the more inteesting facets of this report was management's discussion
of stock repurchases. The companies credit agreement does allow for limited stock repurchases from shareholders(as long as covenants are not violated), and they also occasionally purchase shares on the open market.

Of note, the company plans to expand, and will build a production facility on land it currently owns. The project is expected to be completed in the Fall of 2008, will cost $7,000,000, and will be debt financed.

Avoca (AVOA)
Shares Out: 8059
Bid/Ask: $6250/$6850
Mkt Cap(bid): $50.3 million
Book Value/share: $981
Tangible Book Value/share: $981

Royalty Trust Avoca, owner of 16,000 acre Avoca island, reported revenues of $1.45 million for the second quarter, down 51% from the same period last year. Net income
fell to $952,000, or $118 per share from $1.754 million, or $218 per share.

Revenue fell primarily due to the loss of production from one of the companies gas wells, Avoca No. 6-1, which expectedly went off production. Although the price of natural gas increased 1%, five of the six remaining wells saw declines in production. Natural gas production represented 80% of revenue in the quarter.

The balance sheet remains strong, with $465 per share in cash and short term investments, and $434 per share in long-term debt and equity investments. The company has no debt.



*The author has a positions in Avoca and Bactolac This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.