Greenbackd

ARC Wireless Solutions (NASDAQ:ARCW) has filed its 10K for the year ended December 31, 2008. In a disappointing development, ARCW has entered into a “financial advisory engagement” with a Brean Murray Carret and Mr. Hassan Nemazee for “financial advisory and business consulting services, including restructuring services,” pursuant to which ARCW pays fees for services. Over the life of the agreement to 2013, ARCW will pay no less than $1.5M. The agreement means that Brean Murray Carret will earn more than other shareholders by running the business and has no incentive to create a catalytic event in ARCW. That means our investment thesis is gone and we’re exiting on that basis. We opened the ARCW position at $2.86 and it closed yesterday at $2.75, which means we’re down 3.85% on an absolute basis. The S&P500 Index was at 845.71 when we opened the position and closed yesterday at 843.88, which means we’re down 3.63% on a relative basis.

We started following ARCW on January 28, 2009 (see our post archive here) because it was a net cash stock with an activist investor, Brean Murray Carret, disclosing a 13.9% position on November 3 last year. ARCW closed yesterday at $2.75, giving it a market capitalization of just $8.5M. We initially estimated its liquidation value to be around $13.9M or $4.49 per share. After reviewing the 10K, we’ve now reduced our estimate of the liquidation value to $12.4M or $4.00 per share. The decrease is mostly attributable to cash used to fund operating losses in 2008. Brean Murray Carret’s original 13D filing disclosed its intention to tip out ARCW’s board and “nominate an alternative slate of directors for election to [ARCW’s]’s Board of Directors at the earliest possible opportunity.” Its subsequent 13D filing indicated that this occurred quickly, and Brean Murray Carret’s nominees were elected by the board of ARCW on November 12, 2008. Unfortunately for us, it seems Brean Murray Carret will run the business rather than realize the assets.

The value proposition updated

ARCW is a loss-making, generally cash-consuming company. The company’s balance sheet has, however, retained some value (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

Off-balance sheet arrangements and contractual obligations

According to the 10K, ARCW has no off-balance sheet arrangements and its contractual obligations are $0.9M in total.

The value remaining on ARCW’s balance sheet is as a result of its sale in 2006 of its wholly owned subsidiary Winncom for $17M. The company has since burned through some of that cash, but it does still have a net cash value of $11.0M or $3.56 per share.

The catalyst

We missed this in our initial analysis, but fortunately commenter Chad was awake. One disappointing development in ARCW since Brean Murray Carret got control of the board has been the company’s entry into a “financial advisory engagement” with Quadrant Management, Inc., which is under common control with Brean Murray Carret and Mr. Hassan Nemazee. Between them, they beneficially own 27.5% of ARCW. Pursuant to the “financial advisory engagement,” Quadrant provides to ARCW “financial advisory and business consulting services, including restructuring services.” ARCW pays the following: 1) an initial cash fee of $250,000; 2) an annual fee of the greater of (i) $250,000, or (ii) 20% of any increase in reported earnings before interest, taxes, depreciation and amortization after adjusting for one-time and non-recurring items for the current financial year over preceding year, or (iii) 20% of reported EBITDA for the current financial year, and; 3) all reasonable out-of-pocket expenses incurred by Quadrant in performing services under the engagement.