Sunday, August 28, 2005
Very Bad Business Idea
So when I stumble into "Malibu Cola" aka Calcol (horrible website), I find it interesting. Their photo gallery shows things like two people pouring sugar into a funnel as part of their manufacturing process. yeah, that's definitely going to get them a low cost-of-goods-sold. Other photos show their manufacturing process, as if making cola was rocket science. And even rocket science is becoming more of a comodity.
They apparently tried to enter a viable niche market back in 1989 with a marijuana spiked product. They may have run into regulatory problems.
When Chinese people want a cola, I'm thinking they're going to be choosing Coke or Pepsi.
It makes me think of all the local brands of soda and beer that got destroyed by the major players (they weren't even potential micro-brews).
But its expansion plans will allow Malibu to take on global names such as Coca-Cola Co. (KO) and Pepsico Inc.'s (PEP) Pepsi Cola, as well as local players such as Future Cola made by Hangzhou Wahaha Group Co. as an almost nationally available brand.
But even with three bottling plants in China, the company's spending plans are still pretty much small beer compared with the billion-dollar investments by the global giants.
Rivals Pour In Billions
Coca-Cola has spent $1.1 billion in China since 1979 and expects to invest an additional $150 million to build six more plants in the next five years to add to its existing 28 bottling plants.
PepsiCo has invested $1 billion in China to set up 14 bottling plants andmore than 20 joint ventures across the country.
While Coca Cola and Pepsi are available throughout most parts of China, sales of Malibu Cola, Malibu Diet Cola, Malibu Sunrise orange drink and Malibu Surfs Up lemon-lime drink are limited to Beijing and the surrounding areas such as Tianjin and Hebei province.
UPDATE Dec 8, 2005: According to the 2nd Immutable Law of Marketing, Malibu Cola should have a brand that is purely local to China, or even to a particular part of China. Coca Cola is a global brand that stands for all things foreign and sophisticated (to people in China), so Malibu Cola should be totally local in every way like Jack Daniels.
UPDATE Dec 14, 2006: Malibu cola is being distributed in various stores in China like Wal*Mart, news update. That doesn't change my view. They may even be successful, but I'm not betting on them because I see what I believe are key weaknesses in what they're doing. Looking at them again, I see nothing yet to change my opinion.
But even if they got beyond that issue, there's another issue that's even worse. There doesn't seem to be any financial disclosure by CLCL whatsoever. No SEC filings, no financial reports that I can find, nothing. Just vague claims. I completely understand why that might be the case: the information is [probably] shared only among a select group of investors who closely hold the company (as they say here). But if that's the case, why issue any press releases at all. Since I have no detailed information about the company, I see no reason to follow it, except for pure entertainment. If someone sent me detailed information about the company, I'd be happy to render an opinion on it, when I get the time to do so.
Saturday, August 27, 2005
Avalon Correctional Services (CITY)
Most of the assets are property and equipment, with some assets held for sale. Revenues have been climbing the last few years. The big question is about the discontinued operations that shows up every year. Every year they dispose of property.
406-bed operation in OK City
320-bed operation in Tulsa, OK
160-bed medium security operation in Union City, OK
150-bed medium security operation in El Paso, TX
324-bed medium security operation in El Paso, TX
180-bed in Del Valle, TX
207-bed in Henderson, CO
307-bed multi-use in Greely, CO
leased 352-bed intermediate sanction unit in Tulsa, OK
leased 35-bed in Denver, CO
day reporting center in Thornton, CO
AR is due from various governmental agencies under contract.
Buildings and Improvements: 10-40 years (that's a large range)
Furniture and Equipment: 5-10 years
Transportation Equipment: 1.5 to 15 years (that's a large range)
Most PP&E assets are buildings and improvements ($25.7 million before deprec). About 20% depreciation at end of 2004.
Planned sale of Union City facility. Will probably bring in more than book value.
Company owns 15% of an assisted living center (is it a prison?) and has guaranteed debt of $900K. Reduced carrying value to zero. Can claim proceeds from sale to recover debts. This is held for sale and is (part of?) discontinued operations. It was sold on March 17, 2005. There are still $4.4 million in assets held for sale.
Four government agencies accounted for more than 10% of revenues, one of them was lost after 2002. The remaining three have been mostly unchanged.
Long term debt maturities:
2005: $1.7 million
2007: $4.2 million
thereafter: $25 million
There are a number of covenants, all in compliance. $1.5 million in long-term restricted cash.
1.6 million treasury shares are pledged as collateral, but not counted as dilution.
Black Scholes pro-forma earnings per share drops from 8 cents to 7 cents, assumes a short life expectancy (2.75 years). On average, about 150K shares are granted each year. Share count has been stable over the years.
Transportation vehicle purchases and some debt have been personally guaranteed by CEO.
CEO has been with company since founding. COO is retired director of OK Dept of Corrections. CFO started in 2004, was auditor with E&Y.
CONCLUSION: Interest expense could start going up seriously over time and eat into their profits. Otherwise, they'd be worth maybe $3 a share.
Wednesday, August 24, 2005
China Energy & Carbon Black Holdings (CHEY)
Dec 29, 1995, Huayang International Trust signed over 95% of its investment in Haitong and 20% of investments in Hotel Group to Power Capital Corp in exchange for 6 million shares of PCC stock. PCC changed to Huayang International Holdings. Shares traded on OTC BB as HIHI in Jan 1996. Delisted in 1999 due to non-reporting. Jan 2002 re-listed back as HIHI. Aug 2004, HIHI completed share exchange with China Carbon Black Holdings Company in HK ("CCB"). HIHI acquired CCB in exchange for 6 million HIHI shares after a reverse split. CCB now owns 100% of Xin Jiang YaKeLa Carbon Black. Sept 2004, company name changed to current name. Sept 2004, Company sold 95% of Shenyang Haitong House Properties Development to former CEO Gao Wan Jun.
They make 2 kinds of carbon black: regular and ultra pure (which is used in metals).We buy stranded natural gas (a form of natural gas derived from oil exploration
and production) from SINOPEC and PetroChina. With the Company's proprietary
technology, we process stranded natural gas into various grades of carbon black.
Carbon black is widely used in tire making, road building and steel manufacturing
in China. The quality of our natural gas carbon black is superior to that of tar
carbon black in that our product is cleaner to make and easier to purify.
The 10-K then spells out the facilities in excellent, precise detail. Also it lists the main customers of each type of carbon black.
12 sales people in 12 provinces, all report to the CEO.
Regular: 10 external regional distributors.
Ultra pure: 30 regional distributors, with main cities listed.
- Proximity to resources
- Access to raw materials through relationships with Sinopec and PetroChina
- Have been lowering costs of production over time
- Sales channel developments
- Vertical integration with fields and pipe facilities
- Expanding to further lower costs
Extra Crispy: The major competitor is Sichuen Chuen Nam Carbon Black Company Limited (700 tons/year).
120 full-time employees: sales (12), production, QA, admin, tech services.
Start of 2005, entered energy and power business, acquired South Xinjiang Power Holdings from HK for 1.338 million shares. Power plant in Xinjiang PRC. Estimated net asset value of $1 million.
In an August press release, they describe the details of this deal. Issuing 39 million shares!!! for a 14 megawatt power plant (which would power about 12,000 homes) which they claim is worth $6.8 million. A quick Google check seems to verify that value, roughly. But now they have what seems to be an inferior business with huge capital requirements for growth. The carbon black industry probably would generate $700K/year and grow with the economy.
7 million shares worth perhaps $11 million. (roughly $1.57/share)
destroying roughly 75% of the value of each share!
Why not just wipe your butts with a Ming dynasty painting while you're at it?
China Finance Online (CHFI) 10-K
The business is substantially dependent on the level of trading activity in China's securities markets. Right now [Aug 2005] the market is at an 8 year low. Volume was only 28% of the previous year.
CFO Pro product targets institutional customers. Probabilistically, these guys are not likely to be the winners in the emerging online market for financial products. They're stuck in the "free information" glut which I don't expect to be easy to overcome. They buy real-time quotes and stuff from the Shanghai and Shenzhen stock markets and offer it to customers. Shanghai stock market contract expires May 2008. Shenzhen March 2006. They get preferential tax treatment from PRC which could end at any time.
After considering what I heard on the conference call, I have to believe that as the financial markets get better established in China, there will be winners and losers. I have no idea whether this company will be a winner, and it doesn't seem like it.
Monday, August 22, 2005
China Finance Online (CHFI)
August 1, 2005 conference call
New CEO gave presentation, CEO doesn't speak English (has translator). Based on my assessment he seems somewhat quiet, thoughtful, and probably delegates well.
Shanghai stock market continued to deteriorate
but advertising business improvements offset that somewhat
plans to expand products to limit exposure to Chinese stock market
wealth mgmt increased 18% as an industry in China
they're claiming the current $200 billion in personal wealth mgmt industry will grow compounded 30% over the next 5 years. Way too optimistic in my view.
They believe now is the time to enter the wealth mgmt sector. a) GDP growth and middle class expansion, b) WTO says foreign banks will have full access to Chinese markets after 2006, c) at that point, competition will be greater than now.
Beta testing is done, launch during August.
3 channels: website, 30 co-branded partners websites (includes 5 of the top 10 in China), banks/insurance companies/etc.
Actively negotiating with other financial service providers.
CFO (English speaker)
$335K revenue in advertising. Not direct sales, now working with agents.
Stock market up 8% since low in June. Currency revaluation. Central bank is offering loans to key brokerages in China. Companies can repurchase shares on the open market. Stock dividend tax rate is being lowered for individual investors.
Gross margins are high partly because of locked-in rates?
Cash is down from previous quarter due to $10m stock repurchase (1.659 million ADRs, or 8.3 million shares). Without it, cash would have slightly increased. BoD authorized another $10 million stock repurchase.
Currency revaluation will obviously help US investors.
1) JP Morgan HK: SG&A increased quite a bit, signed on portals, any indication or stats that traffic to site has increased? Also, Chinese stock market, will it go up? :-)
Yes, Marketing has increased due to exclusives. Partnerships and co-branding brings in lots of new traffic. Traffic has increased 20% despite very weak market environment.
Outlook is not CFO's responsibility to forecast market. There are signs of turnaround. Up 8%, volume increased. Otherwise, no idea. Long term, it will track China economy [yes, exactly!]
Followup) Also, personal finance launch in August, any expectations?
Very successful beta testing in last 1/2 month. Launch in next few weeks. First, get into the mass market, get lots of coverage. Then collect fees later on. This means it starts at a loss.
Followup) How to collect payment?
Good question. [???] There are electronic merchants to collect fees. Online payment, phone payment, financial institutions, etc.
2) P. Jeffries US: Top line is second consecutive Q of top-line decrease. With the personal finance product going out for free, any expectations of top-line growth? Lower?
Costs are low now because online marketing campaign is pretty much finished in Q2. No significant growth in expense. Financial market is very weak in Q2, seems to be stabilizing. Maybe some bounceback in Q3. Depends on market in general. Advertising will possibly grow in Q3. Q3 will be "stable" at this level.
Followup) Operating margins: these should improve, will it be better than Q2?
Yes, those numbers should stabilize, assuming financial market doesn't get worse.
Followup) How long will the pers finance be free? What metric to use to switch?
The product may not be free. They will charge for product. End user will pay in the form of fee via the bank or whatever. They wanted to distribute as many copies to end user as possible. They will monitor and adjust accordingly. They don't have a clue right now, in my opinion.
Followup) Will cooperate with other financial partners?
Strategy didn't change. Waffling, not clear. Not a lot of top-line growth in the future.
3) Some US guy in China: Any forecasts?
No. [wise move]
4) Some guy in the US: Is the advertising revenue exchanged for other advertising revenue or cash? [haha, like the dot com era in the US]
Co-branding, Company embeds its content into the partner's financial channel. If you're in China.com security channel, you see the whole content provided by the Company. Also, logos are combined.
It's considered cost, not revenue. Company is paying some of the partners, some are free. It's one-way only, not phoney revenue.
Followup) total paying subscribers is as expected based on numbers (new and repeat)?
Yes, but due to US GAAP, must amortize over a year period. The number given was collected in this quarter, but apparently not the GAAP number.
5) Another guy in US: Any idea for the ASF (subscriptions) for the rest of the year?
Yes, it has stabilized in the past quarter, but it's very difficult to forecast.
Followup) Deferred revenue, if we multiply ASF by users (Q2 vs Q1), Q2 fee for quarter went down but deferred revenue went up.
Advertising revenue in Q2 went up a lot. Much of that is amortized over a 1 year period. So a lot of the deferred revenue is from advertising (some 1 year, some 6mo), not ASF.
Followup) What industries are advertising?
So far they've signed up 10 advertising agents. Car makers, banks, financial institutions, real estate.
Sunday, August 21, 2005
COR Equity Management (CEQH)
April 6, 2004: buying back 1 million shares
April 13, 2004: From Tampa Bay, the city that brought us restaurants such as Hooters and Outback Steakhouse, COR is investing in the not-so-great sounding restaurant, EVOS.
August 13, 2004: spinoff of medical business.
There's some sort of complaint about CEQH on a website that wants money to let you see it. Sorry, not interested.
Saturday, August 20, 2005
China Evergreen (CEEC) Announcement
Completion of a 20,000 ton/day waste treatment plant as a BOT. Total investment was $3.6 million. Lifetime is 22 years. Expected revenue: $600K to $650K per year. If we estimate the costs of running the plant at $100K per year and the revenue is at the lower end of the scale, then doing a DCF, the return exactly matches the investment at a discount rate of 13.1%. The company is selling for at least 2x book value. They aren't using much leverage (the leverage now comes from what seems to be temporary effects). So if return on assets are generally in the 13% range, then this doesn't look great for owning the stock.
UPDATE Aug 23: And so the stock goes up 40% in one day. Oh well.
China Evergreen (CEEC)
Walking through the CEEC 10-K/A:
Non-transitional, Nevada, Dec 31, 2004.
Guanzhou, Guangdong, PRC
market cap $4,352,240 at the time
100 million shares
Ammendment adds additional disclosure about the business and add certain contracts as exhibits.
They provide "turnkey" and build/operate/transfer "BOT" waste water engineering design and contracting.
Turnkey: Phase 1: survey and design, Phase 2: Construction and equipment installation, Phase 3: operation and management services. No investment by the Company. Handover after phase 3.
BOT: Company builds and operates the plant and invests in it. Contract term is usually 20-30 years. Municipal government contribute the land. Company provides the investment and daily management. After the contract period, the project is transferred to the government. Typical capital return period is 5-6 years for the Company.
NAME OF BOT PROJECT OUR INVESTMENT CAPACITY/PER DAY PERIOD COMMENCEMENT90% ownership: Tian Jin Shi Sheng Water Treatment Company ("TJSH"). Commissioned Nov 2003, 10,000 tons daily.
------------------- -------------- ---------------- ----------- ------------
Tianjin Wuqing Wastewater RMB 9 million 10,000 tons 20 years November 2003
Treatment Plant (Phase 1)
Xinle Wastewater Treatment Plant RMB 34 million 40,000 tons 22 years October 2003
Haiyang Wastewater Treatment RMB 30 million 20,000 tons 22 years June 2005
Beijing Tianzhu Wastewater RMB 20 million 20,000 tons 25 years Operation expected to
Treatment Plant (Phase 1) commence in third
quarter of 2005
Handan Fengfeng Mining Area RMB 29.25 million 33,000 tons 22 years Operation expected to
Wastewater Treatment Plant commence in first
(Phase 1) quarter of 2006
35% ownership: Xin Le Sheng Mei Water Purifying Company ("XL"). Commissioned Nov 2003. Treatment 40,000 tons daily.
Manage both on contract, but revenue is immaterial.
Developed treatment facility in Hai Yang City ("HY"), 20,000 tons/day. Started operation June 05.
Developing another treatment facility in Beijing ("BJHTSY"), 20,000 tons/day. Completion expected Sept 05.
Oct 15, 2004 reverse merger.
April 2005, private placement of 20 units, received $25K each: 12% convertable debenture $25K, convertable into common at $0.20 per share or 10% discount to the share price of the next private placement prior to any conversion, also included was 125K detachable warrants at $0.20 per share, expires 10 years. All this for $500K.
Business established in 1999 by Pong Liang Pu, Chairman. Focused too much on innovative biochemical technologies and perhaps not enough on customer problems? The Chairman has patents (oh geez!), granted to Company.
They have successfully completed design and construction of 14 waste water facilities in China, 120,000 tons per day (3 accounted for 70,000).
Customers: municipal governments, food processing plants, beverage plants, industrial plants. Company was recognized as a "Key Enterprise in Environmental Industry in PRC" by General Bureau of Env. Protection of China. Also "High-Tech Enterprise" by Bureau of Science and Technology of Guangzhou.
Wastewater treatment is fairly new in PRC (gasp), started in the 1980s. Total waste in 2002 was 23 billion tons municipal, 26 billion tons industrial. Only 25% was treated. Government considers it "a policy priority" and wants 90% treatment by 2030. Government is offering some incentives to businesses.
Before 2003, facilities for fresh water supply were owned and operated by local governments. Rapid industrialization has put severe stress on the system. Fresh water supply is also opened up to private sector and international operators.
Company customers include municipal governments at the city, district, and town levels. Private customers include steel, car, electronics, chemical, food, beverage, paper, printing, breweries, hospitals, pharm. Each has it's own needs.
Main competitor is Beijing Capital Co.
True Global Limited accounted for 97% of sales in 2004 due to the sale of a BOT project in Q4 04 to that company. [That's not sales, that proceeds related to investments or proceeds from discontinued operations].
The Company creates an on-site company for each BOT project.
They talk a bit about the technology which seems fine. Also quality control which seems ok, but could be more defined. They outsource the design and construction to various contractors: East-North Design Institution of China Civil Engineering, 20th Group of China Railway Co.
3 types of equipment: electrical, automated control systems, test/analysis/detection/monitoring.
52 employees: 8 sales/marketing/service, 12 R&D, 25 finance and admin, 7 operations.
There are new regulations related to this business.
Environmental Impact Assessment: created 1989, revised 2002, effective Sept 2003. EIA must be prepared during the project feasability stage. Approval is required.
Three Synchronies Policy: installation of pollution prevention and control facilities during construction phase. Must be inspected and approved by EPB.
Permitting requirements: Discharges must be registered.
Reporting requirements: Anyone who might pollute must take appropriate measures, etc. etc.
WASTEWATER DISCHARGE. Two types of wastewater discharge systems are defined in China: (1) polluted wastewater discharges (typically industrial and domestic wastewater) and (2) non-polluted wastewater discharges (for example, storm water). Separate drainage systems for polluted and non-polluted discharges are required for a facility in which a municipal sewer system is available.Principal offices are 400 sq mtrs in Guangdong. Leased for 240K rmb/year.
No legal proceedings.
Voting to authorize 200 million shares and 50 million blank check pfd stock.
In July there were 45 recorded holders of stock.
No allowances in AR.
For turnkey operations, customers are biled on a percentage completion basis.
For BOT operations, customers get billed when operations begin.
The income and cash flows statements are fairly meaningless given the nature of 2004 business.
PKF accountants in HK.
The gigantic increase in AR is from the sale of the BOT business mentioned above.
Depreciation rates are ok, except 10 years for cars ($122K assets) (like the other Chinese company I recently looked at). I drive my own cars for 10 years. Plants are correctly depreciated over 20 years because at the end, they don't own them.
Revenue recognition seems standard.
They're evaluating the effect of share-based compensation accounting standards on the business.
Obsoleted inventory of $13K.
$3.16 million due from related company run by the Chairman. Guang Dong Xin Shen Environmental Protection Company. Interest free, unsecured, repayable on demand.
$27K due from directors. Interest free, unsecured, replayable on demand.
$1.7 million due from an associate. same terms, sheesh!
Infrastructure assets are split between HY ($2m) new last year, TJSH (which they incorrectly called TJ) ($1m), BJHTSY ($0.4m) new last year.
equipment (before depreciation)
office equipment: zero?? ($6K for 2003)
furniture and fixtures: $6K
tools and equip: $25K
motor vehicles: $122K
only $57K depreciation.
Limited view into 35% owned entity, as expected. Revenue=$1.15 m, profit=$0.45m, results for 2003 all loss startup. Balance sheet most assets are infrastructure, lots of prepayment and deposits, $3.6 million due XXM. Equity=$1.1 million.
Accrued liabilities are mostly "other payable", with PRC tax also, plus small amounts of everything else.
I'm not sure I exactly follow the income tax statement.
Prepayment, deposits, and other receivables are almost entirely "other receivables" with no explanation.
Committed cap ex: $3.1 million for constructing 2 BOT wastewater plants, all within 2 years.
There are some items that portray the company favorably.
NAME AGE POSITIONMr. Pu was CEO and GM of a similar company from 1999 to 2004.
---------------------- ------- -----------------------------------------------
Chong Liang Pu 46 Chief Executive Officer, President and Director
Ren Cai Ding 46 Chief Financial Officer
Jia He Li 62 Chief Operating Officer
Shi Rong Jiang 30 Director
Lin Hong Ye 62 Director
Mr. Ding was CFO at Pu's previous company, and other stuff before that.
Mr. Li was also at Pu's previous company.
CEO salary is $24K, no other compensation.
Pu owns 57.5% of the company.
Jiang owns 5.1%
Gao Yongping owns 10.1%, no mention anywhere else.
No audit committee.
Audit fees: $56K, no other fees.
Friday, August 19, 2005
China Education Alliance (CEDA) 10-K
Reverse merger on Sept 15, 2004.
Nov 17, changed name.
http://www.edu-chn.com/, which is the only website in China having copyrights of examination materials of Chinese primary schools and middle schools, so that ZHLD legally provides target users in the age group of 7 to 18 years with downloadable examination materials. ZHLD also provides other services such as text book downloading and SMS. When the visits to its web site increase, and its membership base expands, ZHLD plans to expand its products into the advanced education market and adult education market.The company has developed some educational software with a database covering all levels of basic education.
Through cooperation with the local education committees and schools, ZHLD started its business in Heilongjiang and now has 270,000 users who visit its web site. ZHLD projects over 50 million users over the next five years, based on demographic trends and an increase product offering on its web site.They're doing the right things to avoid price erosion in the future.
- Applying for copyrights for the examination materials and educational course data that the Company has collected.
- Entering into exclusive agreements with local educational authorities and schools. In return, the Company will agree to pay such authorities and schools approximately 30% of the earnings as a commission. It is planned that this will prevent potential competitors from contacting these school partners directly to solicit business. Currently, the Company has entered into these types of exclusive agreements with approximately 150 schools.
Additional dilution is likely.
Currently located in a shopping plaza in Harbin PRC. 11,373 sq ft. Property was contributed [by who?] "in connection with its Plan of Exchange." No rent. No strings attached. No need to expand anytime soon.
No legal proceedings.
Revenues for 2004: $51.7K (mostly debit cards)
Net loss for 2004: $110K
55.3 million shares
Assets: $2.5 million
Equity: $2.4 million
They're recording revenue when the debit card is sold (wrong accounting, based on what they say elsewhere, fixing this problem would require an overhaul of the business!), should be when the materials are delivered.
Company expects COGS to be 25% for 2005.
In addition, volume discounts will be available to them if the Company is successful in achieving sales growth in the future, which will further reduce their cost of sales as a percentage of sales.Are they saying what I think they're saying: that volume discounts result in lower COGS relative to sales?
Selling, general and administrative expenses for the period ending December 31, 2004 were $11,346. The expenses were primarily attributable to the initial set up costs and website creation.This stuff should almost certainly be capitalized over the expected lifetime of the website. Their auditors are in for a nightmare at some point in the future if they need to be US GAAP (maybe even Chinese GAAP).
Cash flows used in investing activities were $2,101 for the period ending December 31, 2004. Cash flows for the 2004 were for the purchase of property and equipment.What? was that like one computer or something? Just how amateur is this operation?
If the Company is unable to receive additional cash from their related parties, the Company may need to rely on financing from outside sources through debt or equity transactions. The Company's related parties are under no legal obligation to provide them with capital infusions.I get the sense that these people don't have a solid understanding of business and accounting. Once they've sold shares, they need to treat the business as a business and not as a sole proprieter operation. I also get a sense that it could be a fraud.What would need to be verified:
- Jimmy Cheung Company (who shows up again here) needs to affirm that they did indeed audit this company.
- Jimmy Cheung Company would need to be checked out.
- Would need verification of an actual distributor that is known to be real.
- Would need to buy one of the company's debit cards and do a transaction and verify the materials with someone with some knowledge of Chinese primary education.
Thursday, August 18, 2005
Strathmore (STHJF) shifts into higher gear
To earn its 50 per cent interest in the Hall Lake Project, NAG must make an initial cash payment of C?$150,000 to STRATHMORE. Furthermore, NAG must also advance $400,000 for property exploration costs before October 15, 2005 and an additional C?$600,000 before September 15, 2006. Upon completion of the second year expenditures, the companies will form a joint venture to continue the exploration of the project. STRATHMORE may buy back a 1 per cent interest in the project by issuing 25,000 shares to NAG.Duddridge Lake cost the company about C$350K. It's effectively selling half of it for C?$850K.
To earn its 50 per cent interest in the Duddridge Lake Project, NAG must make an initial cash payment of C?$150,000 to Strathmore. Furthermore, NAG must also advance C?$250,000 for property exploration costs before April 30, 2006 and an additional C?$450,000 before April 30, 2007. Upon completion of the second year expenditures, the companies will form a joint venture to continue the exploration of the project. STRATHMORE may buy back a 1 per cent interest in the project by issuing 25,000 shares to NAG.
Some more work was done at Duddridge conforming to the new mining standard (NI 43-101), estimating something like 400K pounds of U3O8 inferred mineral resource, but we all know about mines and liars. The previous estimates were fairly high. I had estimated 500K. I don't know exactly how this all lines up.
rough envelope style calculation:
Based on Q1 05: The total mineral assets are carried on the books at C$3.8 million, most of the rest of assets is cash. In this case, assets = equity = C$28 million. Market cap is about C$62 million. We use 41 million share count for this calculation. Assuming Duddridge was carried on the books at cost (it's late at night and I don't feel like looking it up) and the total monetization of mineral assets ends up being about the same rate that we sold half the rights to NAG, it would add $14 million to the assets, bringing them up to C$42 million and the company isn't worth what it's selling for now. On the other hand, it wasn't clear before this how Strathmore would be able to mine the U3O8. I don't know any details of who pays the mining expenses. However, if each share now represents 0.75 pounds of minable U3O8 in the ground, then if mining costs are US$25/lb and Strathmore pays half of the total mining costs and the spot price of nearly $30 is accurate, then Strathmore made a bad deal with NAG. Either way, the market may not approve of the details of the press release. Or perhaps my logic of off (which is very possible... it's late).
UPDATE: Yep, the market didn't like it. This is the second time I've had an investment based on long term demand/supply imbalances. The first one, LVLT, was not fun and still hasn't resolved after 3 years.
China Education Alliance (CEDA)
Latest quarter (June 30, 2005):
$423K cash (nearly all the current assets)
$2.4 million machinery and equip (5% depreciated).
$166K current liabilities
$2.5 million equity
$2.7 million assets
revenues $285K ($78K last Q, ramping up)
gross profit: $254K
total operation expenses: $34K
Net Income: $144K
58 million fully diluted shares
$313K operational cash flow (deprec and taxes payable)
no other significant cash flows
58 million shares outstanding
recent stock price 32 cents (market cap $18.6 million)
annualized P/E of 32.3 based on most recent quarter.
(check this one out)
China Digital Media (CDGT) new 10-Q
Balance Sheet: AR nearly doubled. Inventories went up slightly. Current assets overall went up to $3 million from $2 million last Q. Property increased from $5.5 to $6.1 million. Total assets went from $7.6 million to $9.1 million. AP went up somewhat. A director loaned the company more money (up to $138K from $76K). Current liabilities steady at $4.7 million.
30 million shares outstanding June 30, 2005 (plus the convertables). Equity is $4.5 million.
Income Statement: Sales up to $1 million not counting grant. Cost of sales is $80K. Massive gross margins. SG&A increased to $234K ($171 last Q). Deprec is $291K ($263 last Q). Operational income = $706K which is nearly the same as net income.
Net income per fully diluted share is shown as essentially zero. Fully diluted share count is 404 million (undiluted is 30 million).
This seems like they haven't completed the last step in the reverse merger. If so, anyone owning the stock today is holding outhouse wallpaper. So much for CDGT.
China Digital Media (CDGT) 8-Ks continued
5/31/2005: lawsuit from Ziegler, Ziegler & Associates for $1.25 million damages from using their e-mail address and internet domain name to distribute promotional material.
The Registrant contests the allegations of the Plaintiffs and has retained counsel admitted to practice in the U.S. District Court for the Southern District of New York to vigorously defend the action. According to the Registrant, it did not hire a stock promoter or a spammer to distribute promotional e-mails, and it is as much a victim of the activities complained of as are the Plaintiffs.6/20/2005: Strategic alliance (more like an acquisition) with Pukonyi Culture Development Ltd. in PRC. They create TV programming. CDGT gets an exclusive on their programming. CDGT selects a majority of Pukonyi's Board of Directors and gets 90% of their profits. CDGT issues US$183,000 worth of stock. CDGT essentially gets all of their equity (with PRC workarounds). The term is for 10 years.
6/30/2005: CDGT is investing US$205K in a TV production with Guangdong Runshi Movie & Music Production Co. Ltd. in PRC. "The Story of a Small Town" based on a "well known" Chinese movie released in the late 1970s. 24 episodes. Completion expected end of 2005. Distribution to 26 of 33 provincial TV stations throughout China and 3 stations in 2006. Reach of 2/3 of China's TV viewers.
7/5/2005: Update to previous 8-K. Another TV program with Pukonyi and acquisition (which changed its name to HuaGuang Digimedia Culture Development Limited ("HuaGuang"). CDGT is the exclusive service provider, is appointing the majority of the Board of Directors, for US$183K in stock and financial guarantees of US$1.2 million during the term, and gets 90% of their profits.
CDGT is investing $566K in a TV program via Runshi, "Xiguan Affairs". 36 episodes, debut in 2nd half of 2005. Distribution agreements with more than half the provincial TV stations reaching at least half of Chinese TV viewers.
7/20/2005: Another acquisition: Guangdong M-Rider Media Company Ltd. US$133K and stock worth US$915K. M-Rider designs, produces, distributes advertising on TV channels. Guarantee of operation cash flow of US$1.2 million or else the share count above gets adjusted downward.
There are laws limiting foreign ownership of ad agencies in PRC, so this acquisition is structured as a strategic alliance with the same terms as the other deals above. The law is scheduled to be removed on Dec 10, 2005 and the acquired agrees to transfer ownership to CDGT at that time. Legally binding documents have been created in PRC.
7/21/2005: Auditors resigned! No disagreements, no qualified opinions except the going concern statement. Jimmy Cheung & Co. engaged. These guys were mentioned earlier. The previous auditors were in the US which makes them useless for a PRC business as mentioned in an earlier post on Chinese law.
8/10/2005: On the defaulted notes mentioned on 5/9 above, CDGT received US$971K of it so far. CDGT approved an additional 3 month extension for the rest. Interest rate is 9%.
Wednesday, August 17, 2005
China Digital Media (CDGT) 8-Ks
4/21/2005: Roth shuts down the 3 Florida beauty salons. Is this a Corleone thing?
4/26/2005: The reverse merger which amazingly took place in the future.
On December 28, 2005, Hairmax International, Inc., a Nevada corporation and predecessor of the Registrant (“Hairmax”), executed a Plan of Exchange (the “Agreement”), among Hairmax, Arcotect Digital Technology, Ltd., a corporation organized and existing under the laws of the Hong Kong SAR of the Peoples’ Republic of China (“Arcotect”), the Arcotect Shareholders and the Majority Shareholders (as defined) of Hairmax.Feb 18, 2005: name change to China Digital Media Corp, registered with NV, got ticker from NASDAQ.
March 31, 2005: 1.5 million shares issued to Arcotect shareholders in HK. Acquisition done. Arcotect financial statement follows, audited by Jimmy C.H. Cheung & Co. of HK. Unqualified opinion.
Arcotect, as endorsed by Microsoft. Sort of. Chinese website.
Balance sheet (Dec 31, 2004): [US?]$6.6 million in assets. Nearly all property (set-top boxes and smart cards) with some inventory (probably same, but not in customer hands), AR, and a little cash. 0.3 current ratio. $3 million in liabilities, all current, nearly all AP. $3.2 million equity.
Income statement (fy 2004): $2.6 million digitization of TV signals revenue. $59K software devel revenue. $1.2 million government grant (explained elsewhere, to cover set top boxes for customers etc.). Insanely high 79% gross margins (partly due to grant being revenue). $400K SG&A. $415K deprec. $1.9 million income. Shares outstanding: 2 [two point zero]. Take that, Warren Buffett!
Cash flow (fy 2004): $4.7 million from operations. Capital expenses of $5.8 million. $1.1 million proceeds from stock. Some related party stuff.
Car depreciation period is 10 years (hey, that's how long I normally drive my cars!).
I'm getting ahead of myself again. Digitized TV in Nanhai. Smart cards and set-top boxes are loaned or sold to customers. Some installation fees. Government of Nanhai offers a grant each year for $1.2 million for set-top boxes and smart cards. Grant is recognized as revenue.
No allowances in AR number!
$5.6 million in STBs and smart cards loaned to customers.
$39K of cars.
$196K furniture and office equip.
less than 10% depreciated.
The usual PRC laws and taxes apply (I dealt with this somewhat in July).
85% of purchases from one supplier.
The two founders (each owned 1 share) surrender shares to Hairmax and own 91% of the common stock of Hairmax. Had not closed by Feb 3, 2005.
The pro forma merger financial statements help resolve some issues (NOTE: pro forma means "as if"). It's 4/5 of the way to the bottom.
Lots of questions remain such as Why the big change in depreciation from 2004 to 2005? Supposedly due to acquisition of equip and property. Other questions, too.
30 million shares of common and about 2 million shares of preferred outstanding on May 11, 2005 (convertable into about 4 million common shares post-split). UPDATE: It looks like the 2 million pfd shares are convertable into 400 million common shares. The End.
China Digital Media (CDGT) 10-K
Incorp = NV, period ends Dec 31, 2004
Operated as a BDC briefly until March 28, 2005.
Cleaning Express USA: Florida subsid, cheap home cleaning, 15-20 workers, business was essentially a failure. Hairmax of Florida and Nevada: 2001 till whats-his-name closed them down without authorization. hehe. Etc. etc. This stuff is not important.
Hair salons ended up with non-cancellable leases terminating at the end of 2007. About $9,000/month.
There were some humorous legal disputes with David Dadon, prior Chairman, who believes he is still Chairman of the Board.
We have requested that the Court grant a preliminary injunction, prohibiting the defendant from taking actions that violate the law and perpetuate a fraud on us by representing to any person or entity that he is Chairman of the Board of us or any other officer of us, or is an employee, representative or agent of us, or is authorized to enter into agreements or make statements on our behalf.Plus a few non-material lawsuits against the Company.
The legacy business was actually larger than I thought, generating half a million in revenues last year.
Did some debt and equity placement. 1,975,000 preferred shares issued convertable into 395,000,000 shares of common!! (UPDATE: That's pre-reverse-split of 1-100)
There's an unclear distinction within the 10-K between the legacy business and the new business. They show financial results of the legacy business and then jump directly into financial statements for the new business.
Auditors' statements are on a separate 8-K. Everything is frickin jumbled up.
China Digital Media Corporation (CDGT)
CDGT acquired Arcotect in April 2005, a wholely owned foreign enterprise in China, which operates a cable TV business in Nanhai in Guangdong (200 employees).
The company discontinued its salon and cleaning business in U.S. and will concentrate on the development of its business in the media industry in China.Thanks to former CEO Roth's unauthorized actions mentioned below.
So the company currently has two significant subsidiaries: Arcotect and DigiMedia Service, which is in Shengzhen.
I'm hot-linking to their business model graph (since this is an extremely low traffic site and it's in their own best interests). I like the attention to detail.
The company earned 2 cents in Q2 and the stock sells for $2.50, so it's not a no-brainer as an investment. But it's an interesting company that's worth diving into.
CEO: Daniel C. S. Ng
He is currently the Chief Architect of Arcotect Limited, one of the several pre-selected Hong Kong Government vendor in supplying e-Government information systems. He has been the Chairman and CEO of DCP Holdings Limited, a listed company in Hong Kong (2000 – 2001), who specializes in personal computer manufacturing and Internet related investment projects. In 1999, Mr. Ng was the Director of Cable Multimedia Services of Hong Kong Cable TV Limited, the only cable TV operator in Hong Kong. From 1995 to 1998, he was the founder and President of Hong Kong Star Internet Limited, the first commercial ISP in Hong Kong. Star Internet was the second largest ISP in Hong Kong and merged with HK Telecom IMS (the largest ISP at that time) in 1998.Here's a better description of Daniel Ng:
Mr. Ng has spared no efforts in serving the information technology industry. In 2000, Mr. Ng was elected as one of Hong Kong's "Ten Outstanding Young Digi Persons" by Hong Kong Productivity Council and Hong Kong Junior Chamber. He is now the president of Hong Kong Information Technology Federation, a non-profit trade association founded in 1980 with more than 300 corporate members. HKITF provides a forum in which IT-related business in Hong Kong can work together for the benefit of the industry and to maintain a high level of business practice amongst the members. Mr. Ng is also a committee member of the Electronics & Communications Industry & Health Advisory Committee of the Occupational Safety & Health Council. Furthermore, he is the founding member of Hong Kong Internet Service Providers Association and was elected as the first chairman from 1996 to 1999.
The machine-guns on Daniel Ng's desk are the first hint that he is not your typical Hong Kong chief executive....they will die from my machine guns. [Ok, ok, that was all paint-ball equipment.]
The hand grenade sitting beside his laptop computer grabs your attention as your eyes wander across a collection of scale-model racing cars on the window sill.
But the clincher would be spotting Mr Ng, 35, and a few dozen of his java programmers sweating away at their mandatory exercises in Victoria Park at 7.30 am."We work long hours and if my staff do not have fun, they will die," said Mr Ng
CTO: Mr Ng brings with him Billy Tam another founder of Hong Kong Star Internet Limited, who branched off into cable modem services, BSEE from Seattle University, probably worked for Boeing.
Director of Finance, Corporate Affairs: Daniel Lui
Comes from an IT background. Worked in finance at Tomson Pacific, listed HK company.
Reading these bios, I'd say they could use someone with strong knowledge of PR. Despite the fact that your director of finance has a lot of IT knowledge, it's not a good idea to emphasize it.
Director of Business Development: Lu Chen
Mr. Chen has over 16 years experience of business development in banking, telecom and broadcasting industry and his strong managerial expertise dovetails very well into his areas of responsibility at CDGT. Prior to joining CDGT, Mr. Chen was the founder and general manager of Guangzhou Vispac Telecom Co Ltd ("廣州創見太平洋通訊有限公司"). In his 3-year position, he formed a direct sales team of 100 salespersons, recruited 30,000 employees and set up representative offices in DongGuan & ShenZhen. From 1995 to 2000, he was the founder and AGM of "廣州大菱通訊有限公司", and majored in the expansion of electronic components distribution and telecommunication business in South China region. Earlier, he was appointed as business development manager of "北京大菱通訊有限公司廣州分公司" to instrumental in establishing strategic directions and business partnerships. From 1988 to 1991, Mr. Chen worked for Bank of China after his graduation.UPDATE: Stop following
Tuesday, August 16, 2005
C-Chip Technologies (MANS)
The company recently announced for the quarter ending March 2005 that they had:
One of these things doesn't belong here and I'd say it's the last one. Focus means not doing a lot of things so that you do a few things better. Maybe if they buy enough other businesses, their own losses will be harder to see:
- Purchased an Asset Management Solution;
- Acquired Chartrand Laframboise Inc (CLI), a leader investigative services in Canada;
- Purchased Avensys Inc (Avensys), a leader in monitoring solutions for environmental conditions, including air, soil, and water as well as buildings and infrastructures;
- Clearer focus toward becoming a leader in the security business and the broader risk management industry.
Our net loss for the three and nine months ended March 31, 2005 was $1,707,825 and $2,987,908 compared to $698,027 and $3,009,759 for the same period last year.Those who can't do, acquire someone who can and then [mis]manage them.
And when times get tough, the tough change their name.
They should have adopted this company's more blatant mission statement:
Cell Bio-Systems, Inc. (the "Company" or "CBIO") was incorporated as First India Diversified Holdings, Inc.... to engage in any lawful corporate activity, including, but not limited to, selected mergers and acquisitions.Focus! It's all... about... focus!
Monday, August 15, 2005
funny stuff: when presidents go bad
The plaintiff, Engineering & Wireless Services, Inc. ("EWS") demanded payment of $27,748.71 for services rendered to the Company in 1996 and 1997. The Company's President at the time, John C. Spradley, had written a check for this same amount on April 2, 1997 that was returned, unpaid and marked "NSF". Mr. Spradley wrote this check without proper authority by the Company, and actually was strictly forbidden by a board resolution to write any checks in excess of $5,000. The writing of the check to EWS left the Company legally obligated to honor this check.Bad, bad president!
In the "not-funny-ha-ha-but-funny-what-the-hell-are-you-doing" department, YaSheng Group (YHGG) today announced it had gross margins of 100%. That's right, zero cost of sales.
YaSheng Group (Other OTC:YHGG.PK - News), with second quarter revenues of US$196,012,453, published today details of its financial results for the second quarter in 2005.
For the second quarter ending June 30, 2005, the company's operating income rose to US$196,012,453 with net earnings increasing to US$22,688,136, or .15 per share, an increase of 15.38%, versus .13 per share for the same quarter in 2004,
based on 155,097,355 issued and outstanding shares.
Oops! They didn't make the same mistake in the PDF file, but they made... another one there! They show the 6 month "other operating expenses" as being lower than the 3 month "other operating expenses". Holy crap!
UPDATE 8/18: YaSheng issued a correction today.
On the humorous side of funny, keep in mind that this is a serious Chinese company which apparently, like so many, did a reverse merger into a washed-up US business. I didn't use the [sic] notation for errors of English to avoid cluttering up the text (their English is far better than my Mandarin). The Company is involved in digital TV in China.
Edward A. Roth, our former Chairman and President, as well as the consultant and manager of our former businesses in this country, had unilaterally, and without the approval or our consent, terminated the operations of the our three beauty salons located in South Florida, on or about February 7, 2005.
Such termination was not reported to us by Mr. Roth, and we did not find out about this bizarre action until our counsel spoke to an agent for one of the landlords on April 18, 2005. When we were confronted with this breach of contract and breach of fiduciary duty by Mr. Roth, the Board of Directors promptly discharged Mr. Roth as a consultant to all of our subsidiaries and as an officer of the same.
Bad, bad president!
But as for the response, I say Damn Right! Someone has to uphold respect for the principles of business and economic activity.
China Cable & Communication (CCCI)
Sales kicked in during 2004 at $4.7 million with a gigantic net loss of $6.8 million. Revenues for Q1 2005 were $1.5 million (with a half million dollar loss) vs $0.9 million in Q1 2004 (with a $1.6 million loss). Positive cash flow from operations on both, even after factoring in capital expenditures.
Revenues increased over last year entirely due to sales of set-top boxes and cable modems and premium services that they didn't have last year.
There are 77 million shares and 200,000 cable subscribers: 385 shares per current subscriber. They intend to expand (including a subsequent joint venture that doesn't seem terribly promising, but who knows). The share count will almost certainly increase as they need to pay off a $4 million litigation settlement related to preferred shares. There's a good chance that the company will go into bankruptcy depending on the outcome.
The price for this wonderful opportunity is a mere 10 cents a share, for a market cap of $7.7 million. $38 per subscriber.
Saturday, August 13, 2005
Triangle Multi Media (QBID)
Management has announced that the billion shares that were to be retired is complete. This reduction in float will be effective immediately.The stock is trading at about 5 shares for a penny. When you go through their press releases, it's fairly clear that this is not a seasoned business team.
"We converted QBID shares into preferred stock, eliminating fifty-three percent of the tradable outstanding shares. We are confident this will strengthen the demand for our stock, and dry up the supply of trading shares that we feel are being manipulated in the market," said Olsen. "Converting our common stock into preferred stock will allow us to retain voting rights, but will also squeeze out the large short position in the stock. Q Television will continue to be as aggressive as possible, and do everything necessary to ensure our shareholders are treated fairly."If those shares weren't being traded (they almost certainly weren't), then this move was pointless in terms of removing shares from the market. And short sellers on the pink sheets can pretty much do whatever they want, anyway. They could short more shares than exist and you'd never know about it. Complaints about that general problem are even on the main page of the Pink Sheets website.
Unfortunately, there is essentially zero useful information about the stock or the business, the capital structure, or anything else. If you want your share prices to go up, how about this idea: disclosing (audited) information needed by investors using Generally Accepted Accounting Principles and transparent presentation!?!? Do that and get some good business results and you won't have to worry about shorts, they'll be doing the worrying.
Caprius (CAPS) 10-Q for Q1 05
Assets are largely cash, $2.7 million; goodwill $700K; inventories $617K; intangible assets $404K.
Total liabilities are $900K, all current.
Equity is $3.8 million. There are multiple classes of preferred shares involved. In a subsequent event, all of the 66,681shares of Series C Pfd all converted into 2,299,345 shares of common. The company now has 3,321,673 shares of common. There are still 27,000 Series B shares outsanding (no Series A). The Series B shares can be converted into 640,800 shares at prices from $0.50 to $0.75.
(From the 10-K)
GE owns the 27,000 Series B Pfds, purchased in 1997. The Series B Pfds are convertable into 1,159,793 shares of common.
There are also warrants to purchase 1,425,000 shares at $0.28, expires June 2009.
There are warrants to purchase another 261,250 shares of common at $0.15, expires June 2009.
Another set of warrants to purchase 250,000 shares at $0.09, expire in Sept 2007.
Another set of warrants to purchase 300,000 shares at $0.08, expire in Feb 2006.
Another set for 500,000 shares of common at $0.75, expired in June 2005.
Another set for 500,000 shares of common at $1, expired in June 2005.
Another 2.8 million stock options are outstanding, average $0.18, 7 years.
The company lists 20.5 million shares diluted.
(End of 10-K info)
In the March 31, 2005 10-Q, they claim to have 1.482 million shares diluted. However, we need to add another 3.25 million shares due to underwater stock options and warrants and who knows what else.
Assume total super diluted shares: 4.8 million shares
Current market cap: $14.2 million
Stopping here. It's unlikely for me to invest in this company.
Thursday, August 11, 2005
On the good side, it's not a mousetrap; it's a replacement for a more expensive existing mandatory process. It also has regulatory approval in the US and Europe. It has a lot of good characteristics (small, easy to use, reduces volume by 90%). There is a large $10 billion total available market worldwide that is dominated by waste haulers (80%). They are focusing initially on dialysis centers, which is probably a good idea.
On the bad side, P&L is still absolutely terrible. Revenues are ramping up by about 25% per year, but gross margins are only 18%. R&D and SG&A are still more than 2 times total revenues. They might have enough cash to sustain them to profitability if nothing goes wrong.
They hired a sales guy in mid-July. They sold two units in Greece in June, a small unit in the US Virgin Islands (are their sales people focusing on places where they want to go?)
I plan to do some more work on this.
Wednesday, August 10, 2005
China BAK Battery (CBBT)
CBBT seems like a fine company, but it's not selling cheap.
In other companies...
I also get a lot of development stage companies (why are these public?) like Caneum (website). I like how Google asks, "Did you mean 'Cranium'?"Is it a good investment? How the hell would anyone know? Actually, given the financial statements, the employees ought to be surfing the web at Monster.com.
And here's proof that accounting is a purely cold blooded profession:
Net income for the full year 2003 was $737,000 or $0.07 per common share on a diluted basis compared to a net loss of $325,000 or ($0.03) per share for the twelve months ended December 31, 2002. Net income for 2003 was favorably impacted by $500,000 ($0.05 per common share on a diluted basis) of proceeds from a life insurance policy paid upon the death of one of the Company's key employees. Net income was also favorably affected by the reversal of income tax accruals referred to above resulting in an income tax benefit recorded for 2003 of $106,000 ($0.01 per common share on a diluted basis).Sorta gives new meaning to "non-recurring event", unless they plan to kill off one key employee every quarter. Please, God, when I die don't let my key member life insurance cause more than 50% of the total earnings of the company I've founded.
So you'd think that somewhere in the discussion, they'd mention in somber tones the death of an employee. Nope.
"I am pleased to report improved results from operations for 2003 compared to the prior year" commented Louis P. Scheps, President and CEO of the Company. "The Company's new vital signs monitor has been well received both domestically and internationally resulting in increased penetration in markets for our products" stated Mr. Scheps. "The Company has also posted a record ending backlog of open orders for its products which provides a firm foundation for our first quarter goals" Mr. Scheps added.I take it Louis wasn't the key employee from the previous paragraph.
Monday, August 08, 2005
Collections on loans during 1995-1997 were only around 55%. Ouch. Debt increased by about 75%. Equity is lower, fewer shares. Most of the preferred stock was converted.
11/15/04: They made a presentation to institutional investors. This contains an excellent example of how their business model works from a dealer's perspective. Same business model for 32 years. IPO in 1992. UK and Canada in 1996. Completed 8 bank financed securitizations from 1999 to 2002 (all repaid). Developed propreitary CAPS system during late 1990s. Winding down CA and UK business in 2002-2003. Completed private placement for increased warehouse facility in Aug 2004. Why do they need a warehouse?
The declining dealer number (from 1,729 to 789) was supposedly due to CACC terminating dealers not meeting return on capital numbers. In the short term, dealer count is increasing. Loans per active dealer increased until 2003, and is now decreasing again.
The spread between forcasted collections and advance rate dropped during 1995-1997 and is slowly increasing again, supposedly due to CAPS system. The ability to forecast collections is the biggest source of risk.
Liquidity: $76 million available on $135 million revolver (renewed 6/04, expires 6/06). $160 million of $200 available on warehouse facility.
12/9/04: New CFO promoted from within, but not a long-termer.
12/16/04: Banks amended, restated credit agreement (at the request of the Company). Borrowing limits set as a fairly complex formula based on advances, principal balance, hedging reserve. Minimum equity is $210 million plus the sum of 80% of consolidated earnings for the quarter.
12/20/04: Regulation FD of some questions and answers from apparently a conference call. These are definitely worth reading. Comparable sales dropped 6.8% over 2003.
1/25/05: Modifications to stated bank terms, looks the same.
1/26/05: Another Regulation FD: Again, worth reading.
2/11/05: Revised bank terms, this time it's significant, defining collection numbers (actual collections less than 75% of forecast), net yield, and advance ratio.
3/2/2005: Stock options previously approved by shareholders.
3/10/2005: They incorrectly accounted for income tax in previous periods in foreign subsidiaries. This causes net income to decrease in 2003 and 2004 by roughly $2.5 million each year. Loan originations grew 20% in Q4. 10-K delayed. SOX material weakness identified.
3/30/05: 2004 year results. Q4 diluted earnings down to 19 cents (from 22) due to increase in provision, accounting policy change in Q1 of 2004, larger SOX related SG&A, sales/marketing expense (more sales people, bigger convention), partially offset by finance charge increases and foreign exchange.
Full year earnings of 90 cents (vs 60). Collection results generally matched forecasts. Active dealers increasedd 32.6%, although per-dealer volume decreased 8.1%.
The company adds a non-GAAP measure of profit not involving a dart board, no surprise that it results in larger earnings. It does make sense what they do, except for removing non-recurring charges (which itself is a small item). The big difference is that they do a DCF of their loan portfolio to value it.
4/4/05: Bonus and stock option plan for Sr Mgmt based on performance. A bit cryptic for my tastes.
4/11/05: Auditors say Company should account for loans differently (current method dates back to IPO in 1992). Oh, and by the way, we're probably going to be de-listed from NASDAQ.
4/12/05: 8-K/A, Exact same document except with a different date of issue.
4/12/05: Explanation to shareholders of the situation. Definitely worth reading.
4/13/05: More Reg FD questions and answers. Why did they use a 29% discount rate in a DCF example??? This exagerates the difference between calculation methods and is totally unrealistic.
4/15/05: Not able to file 10-K in time. This makes it in violation of loan covenants. Got waiver, expires on April 22. Seeking SEC guidance on accounting for loans.
4/22/05: New waiver, expires May 31.
4/28/05: Same issue, same deadline.
4/29/05: The Company got bored, needed to file another 8-K. Added an amendment to the waiver. Removed guidance requirement.
5/3/05: Q1 results... at least some of them. Loan origination up 4%, 32% jump in active dealers, loan origination per dealer dropped 18%.
CAPS access fee increased to $599. Advance rates increased by 1.5%. Offering guaranteed asset protection waiver and insurance product ("GAP") to consumers, covers the difference between loan balance and insurance payout. These things will offset some un-stated cause(s) of lower revenues in the future. Investors are supposed to be calmed by this?
Actual payments are matching forecasts fairly well based on their detailed table.
April 11 they had received a de-listing notice from NASDAQ. Hearing is May 5.
Company has waivers on all 3 debt facilities regarding late 10-K filing.
5/9/05: Regulation FD Q&A. Good, tough questions (except for #4, which is still good and the answer is worth reading). They're losing to the competition based on price, although they believe the competitors will not make money at these prices (which is entirely likely). In the mid-1990s, they wrote bad loans, but recovered (unlike most others) due to a number of issues. In early 2000s, they had trouble getting loans. But that's gone now... and not surprisingly, competition has increased (as others also get loans). They have their CAPS system and methods in place to limit narrowed spreads, but it seems [to me] that business is likely to deteriorate. When it does, and if they manage to struggle well through it, then I figure it would be a good time to invest.
5/27/05: NASDAQ let them go on for a while (obviously not very long since they're on the Pink Sheets now).
6/14/05: More Regulation FD Q&A. 20% of the monthly CAPS fees were paid by inactive dealers (bad). "GAP" business as 10% in Q1. Some tap dancing around the un-stated cause red-flag I mentioned earlier. It's seems like just a big deterioration in the business. All the more reason to wait this one out.
6/30/05: Del. and Tou. auditors dismissed, probably just as they were about to say something bad.
6/30/05 again: SEC responds. Method of accounting must be changed to a servicer of loans generated by dealers and a lender to those dealers, rather than an originator of consumer loans. This will take a long time to correct. Company plans to ask for an extension from NASDAQ (I think I know how that turns out). And then there's the debt covenants....
7/14/05: Del. and Tou. response to the SEC. Nothing surprising.
7/20/05: Regulation FD Q&A.
Deloitte provided the Company with advice on how to account for its core business that Deloitte itself now says was inaccurate. We relied on this advice to our detriment and are now engaged in a costly process to file corrected statements. For these and other reasons, the Audit Committee lost confidence in Deloitte’s ability to perform their required duties.That's why they're called Toilette and Douche.
Our previous GAAP accounting was complex. We did our best to provide additional disclosures to help shareholders understand the Company’s results, however we are not confident our explanations were easily understood. If we end up with GAAP accounting that is simple and matches the economics of the business, it will be worth the effort.Especially if the stock price drops enough.
7/26/05: Results for Q2. Loan origination grew 6.4%. Active dealers grew 36.2% year-over-year. The increase was due to no longer requiring the $9,850 enrollment fee.
Prospective dealer-partners choosing this option instead agree to allow the Company to keep 50% of the first accelerated dealer holdback payment. This payment, called Portfolio Profit Express, is generally paid to dealer-partners after 100 loans have been originated and assigned to the Company. While the Company will lose enrollment fee revenue on those dealer-partners choosing this option and not reaching 100 loans or otherwise qualifying for a Portfolio Profit Express payment, the Company will realize higher per dealer-partner enrollment fee revenue from those dealer-partners choosing this option and qualifying for a Portfolio Profit Express payment. Based on the historical average of Portfolio Profit Express payments, the Company expects average enrollment fee revenue per dealer-partner for those dealer-partners electing the new option and reaching 100 loans will be approximately $15,000 — $20,000. Approximately 50% of the dealer-partners that enrolled during the second quarter took advantage of this new enrollment option.Forecasted collection rates for 2003 and 2004 increased, meaning they suddenly expect to receive more of the nominal amount.
You can see from the spread table what they were talking about earlier in the un-stated cause red flag. And collection rates did increase over their projections for 2003 and 2004... according to the table.
The parts of the balance sheet they show looks OK, although it's not the least bit detailed and doesn't show equity. Debt increased along with their increasing loans.
New auditors: Grant Thornton.
7/29/05: Late filing causing covenant violations. Waived again, this time till Dec 15.
Why is this stock still trading at $13.50?!?! These people have no fear.
Conclusions: This is a good company, I believe that. Their collections forecasts have been pretty accurate. Their accounting got royally messed up, thanks to D&T. Competition may get severe for a couple of years or more and the whole industry might take a beating. That may have something to do with why NICK has been dropping lately, I don't know. A good, cheap stock price might be in the future. It's not all that cheap right now, considering they've just been delisted, have truly major accounting problems, and have violated covenants.
Sunday, August 07, 2005
Credit Acceptance Corporation (CACC)
CACC started out doing financing for the founder's dealerships. This expanded to other dealerships. Rather than doing normal financing, the company sort of shares a specific part of the risk with dealerships. The company directly finances part of the car and sends that money to the dealership immediately along with the down payment. After the advance has been recovered, 80% of the customer payments go to the dealer. 20% goes to CACC, along with apparently other fees of some sort, including collection costs, some sort of "service contract programs", life insurance(?), and a patented (oh geez) "Credit Approval Processing System" (CAPS), car leases, lease termination fees, and fees charged to dealers when they enroll in the program (watch out for this last one). Only 71% of revenues come from finance charges. Leases have been winding down. "ancillary product income" has been ramping up (13.3% now).
Why involve the dealers in the financing? Why do dealers pay $9,850 to join the Company's program?
Number of dealers involved:
- 1999: 311
- 2000: 293
- 2001: 224
- 2002: 143
- 2003: 399
The company has responsibility for collections. Each loan has a sort of capital structure. At the top of the stack is CACC's collection costs. Next is CACC's servicing fee. Next is the repayment to CACC for the advance made to the dealership. Lastly, any remaining amount goes to the dealer (dealer holdback). I suppose this creates a strong incentive for dealers to not submit garbage loans. Any misrepresentation by the dealer allows CACC to force the dealer to buy out the loan for the remaining balance, less unearned finance charges due CACC plus $500 for-the-hell-of-it fee. The structure of deals is generally set up so the dealer recovers their own costs immediately and some additional profit. Their claims at the bottom of the capital stack are gravy, apparently. Based on watching NICK over the years, I know there's a surprisingly large amount of profit that is squeezed out of high-risk loans.
CACC can audit the dealer's records. CACC can terminate the agreement on a material change in ownership of the dealer. The dealer can simply stop submitting new loans to CACC, but if they terminate the agreement, it's pretty harsh.
They ventured into UK and Canada and admit that it's a mistake (I'm one to talk, I wasted the last 2.5 weeks on automation that, in the end did me no good, thanks to the bizarre reaction of the pink sheets website to block my IP address after downloading a bunch of stuff that absolutely pales compared to what others are doing at Yahoo, and I did spend a lot of worthless time on community banks... ok, back to business).
CAPS does the usual automated computations on risk and return. Dealers submit stuff and instantly see the terms. They can change parameters and see how that affects their advances and customer terms. Pretty standard stuff.
It looks like CACC creates static pools once a dealer reaches 100 loans. At that point, they can elect to take some of that holdback money immediately, based on the usual computations.
Principal due is "loan receivable" while fees due are "unearned finance charge" on the balance sheet.
Average loan sizes are about 50% larger than NICK ($12K vs $8K) and maturities are shorter (37mo vs 44mo). The average loan in 2003 was $12K with a $5.7K advance.
There were 916 dealers who submitted at least one loan during 2003.
CACC has the usual assortment of teams for the various phases of default, including repossession and legal action.
CACC has some deals with insurance companies on life and disability insurance. CACC gets some of the profits in exchange for taking some of the re-insurance risk.
There's some sort of service contract that I'm not sure I understand. Dealers can offer these contracts to customers. The price is added to the loan. A 3rd party then carries the risk. About $22 million in revenue is from insurance and service contracts, something like 15% of total revenues.
The company also provides a plan to finance dealer inventories at 12% to 18%. This was being phased out in 2003. There were other secured credit schemes.
CACC's business is in Michigan, Virginia, Maryland, NY, Tenn, and a huge amount (66%) in "all other states". 694 employees, 439 in collection and servicing.
4.2 million stock options outstanding, average strike of $7.31. Net income has been consistently $28 million up to 2003. Probably something like 60 cents a share in earnings after all stock dilution, present and future.
In 1999, CACC had to up it's provisions for losses on loans made in 1995-1997. They're typically bad at predicting collection rates when loans are growing a lot.
18+% net margins.
Free cash flow seems to have been around $1 per share (earnings are 60+ cents) and the stock is selling for around $13. I need to get more up to date on 2004 and 2005.
(more on the way, all sorts of interesting stuff after this)
New York Health Care (BACL)
OUR MISSION IS TO PROVIDE COMPREHENSIVE, COST-EFFECTIVE AND COMPETITIVELY- PRICED QUALITY HOME CARE SERVICES, THAT CAN ALLOW PATIENTS TO REMAIN AT HOME, IN THEIR COMMUNITIES.That's a crappy mission statement. Allow me to re-write it for you:
When you need it, your doctor's office is inside your home. Like the old days, we make house calls.Notified of de-listing on Jan 04, de-listed in April 04. Subsidiary's (BioBalance) then-president and BACL Director was indicted.
The 10-K defines the "Company" as New York Health Care, Inc. and its subsidiaries. Later they say:
On July 15, 2004, the Company executed a definitive agreement (the "Purchase Agreement") for the sale of the assets of its home healthcare business to New York Health Care, LLC (the "LLC") a company controlled by Messrs. Jerry Braun ("Braun") and Jacob Rosenberg ("Rosenberg"), who at the time were the Company's chief executive officer and chief operating officer, for consideration of $2.7 million in cash [actual price on 5/23/05 was $3 million], the assumption of all of the liabilities and obligations with respect to the home healthcare business and the forgiveness of certain future obligations that may be due to these individuals pursuant to employment agreements each of them has with the Company.The company then raised nearly $5 million selling stock and warrants to private investors. So the company is getting a net $8 million which will be used to "support BioBalance's operations including research and development, clinical trials and working capital." Plus "a $1.7 million loan from the Company to BioBalance was repaid from the proceeds of the Offering."
BioBalance views the human intestines as a sort of ranch for bacteria and their products are basically the introduction of lots of friendly, good bacteria. Balance.
It might be good, I don't know. I'm not investing in it.
UPDATE: Stop following