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Sunday, November 13, 2005

Still more "I" companies

ISSG, design/marketing/manufacture of control knobs for industry/consumer/military ($8.2 million revenues 2004), outsourcing assistance ($3.3 million revenues 2004), inactive CD packaging business. 32 full-time US employees (25 sales/admin, 7 in unionized factory), 22 Shanghai employees. No legal proceedings. Huge variety and number of warrants/options (10 million diluting shares against 19 million actual shares). Unqualified audit opinion. Fairly strong balance sheet. 40% gross margins. 1.1% net margins. Earned maybe 1/4 cent in 2004 diluted. Expensing the stock options put them into a 5 cent/share loss. Cash flow from ops is weaker than earnings. Maybe the business is worth 3 cents. Selling for 30 cents.
not interested

ITAT, owns an IMAX theater plus some other theaters and live performance centers in Branson, Missouri. Includes a family restaurant and food court. Also own a condo unit that's likely to be sold. 70 employees. 50-year lease. No legal proceedings. CEO Bluto and wife (no, not Olive Oil) own 67.7%, that's bad. Unqualified audit opinion. Lots of debt (half of assets). Assets=$8.3 million ($4.4 million depreciated so far). Revenues grew only 2% in 2004 to $9.4 million (declined in 2005). 26% gross margins. 6% operating margins. Net income is only $100K. Return on assets is tiny. They own some sort of derivatives. Cash flow is pretty terrible considering the large capital invested. Solid 7.9 million shares. Business might be worth 18 cents, but the economics don't seem so good. Selling for 25 cents.
not interested

ITER, regulatory compliance services to pharms, biotechs, etc. Lots of big names. Clinical trial support, data management, program management. 100 employees: 10 admin, 7 recruiting, 5 sales, 78 contract service providers. Also 30 outside consultants. No legal proceedings. Acquired Clinical Trials Assistance Corp in April 2004 for 11 million shares and 2.8 million pfd shares (convert to 28 million common shares). The controlling stockholder cancelled 28 million shares of ITER (wow!). Unqualified auditor opinion.

Balance sheet is cash and AR, with some other stuff mixed in. $7 million assets. $5 million debt. Large AR increase due to aggressive sales push. 29% gross margins. Operating loss. Still losing money in Q2 2005.
not interested

ITEX, business-to-business non-cash transaction payment system: another barter broker (like INLM). IRS considers these to be cash transactions and everything is reported to the IRS. This company also sells franchises, however. ITEX makes money charging transaction fees from both buyer and seller (nearly all pay 5% when paying ITEX immediately, but some pay 7.5% by an approx NET 30 schedule). Their medium of exchange "ITEX dollars" allows for some monkey business to take place by ITEX if I read correctly, so cash will be the important measure of their performance. 13,000 members (US and Canada). See this post for some important observations about this business. Based on that, using franchises makes a lot of sense.

I believe it's worthwhile to look more closely at all the companies in this industry. It's possible someone could have just the right business to win big. Competitors: BXI, Continental Trade Exchange (which I've already looked at). eBay, Travelocity, Priceline, Overstock.com, and others are essentially in this business. ITEX believes it is the industry leader. From a net earnings perspective, it looks amazingly cheap: earning 17 cents in 2005 (10-K just came out, I just got it). But cash flow shows they don't make all that much money, as I had figured earlier (I put it in bold just now).

Operating income for 2005 was $729K (vs $1 million in 2004). The net earnings were affected by a gain-on-sale in 2004 and a huge income tax benefit in 2005. There are 18.8 million shares outstanding fully diluted (and probably totally diluted). So real earnings for 2005 are more like 3.9 cents/share which would make the stock worth maybe 60 cents. Free cash flow in 2005 is very close to earnings. But it was zero in 2004. In prior years they lost money.
not interested

IVNE, yet another Chinese reverse merger: Shanghai DSI Computer Technology ("DSI"). Computer system integrator: cabling, routers, switches, firewalls, virtual private networks, load balancing, quality-of-service parameters, wireless LAN, email security, etc. Also helpdesk. 2004 financials in the 10-K are horrible, but not meaningful because of the reverse merger.

Q2 2005:
Assets are about half inventories and half PP&E. Liabilities are very large, but mostly a convertable note payable. The convertable represents 14,248,395 shares of dilution. There appear to be 200 million shares outstanding.

$12 million in assets ($771K intangible).

3-month revenues $1.7 million. 35% gross margins. 7.5% operating margins. No income taxes paid (or benefit). $128K earnings. Cash flow is terrible due entirely to massive inventory increase of $1.9 million (larger than earnings!).

So if we were to believe the earnings of $128K are representative and accurate, then a year's earnings might be $512K or about a quarter cent per share. The stock might be worth 3.75 cents. However, somewhere along the way, they became China Kangtai Cactus (CKGT) and they sell cactus based health foods and related products. I'm not following this at all. Let's back up.

China Kangtai Cactus (CKGT). Their website is interesting, but not very useful. The company has done a 1:70 reverse stock split, so the 200 million shares become 2.9 million shares. However, the promissory note is still there (in exchange for the rest of the cactus business) and represents 14,248,395 shares of dilution after the reverse stock split. That means a total diluted share count of 17.1 million shares... as best I can tell right now.

Unfortunately, the Q2 statement includes both the cactus business and the other stuff that's going away. Right now, there's no way to value the business that I know of.
worth following

IWTT, wholesale importing of ceramic tiles. Had to restate financials due to improper accounting for accrued sales commissions and product returns and sample and display boards (were capitalized rather than expensed). Their results are probably inflated by the housing boom. Ceramic tile use has doubled in the US since 1996. About half of imports come from Italy. Spain and Mexico are big. The rest are from Brazil, Turkey, China, Portugal. IWTT's imports match this distribution. They also import granite counter tops.

Gross margins are 38%. They've had an operating loss for the last 2 years. SG&A has been growing at a humorously large rate over the last several years. Revenues grew almost as fast. Something's fishy about the income statement numbers.

Inventories have been growing and seem fairly bloated (they're 67% of all assets!). Assets are basically inventory with some AR and a dash of PP&E. That's what I'd expect from a Bentley dealership, not a ceramic tile importer. Equity is about 1% of assets. Liabilities are "Note payable, revolving line of credit" and AP. Amazingly, they earned a penny in Q1 and another in Q2 2005. But that seems to be because of a large boost in revenues. And cash flow from ops is absolutely horrible. Operations burned up $5.4 million in cash on revenues of $28 million. Inventories and AR increased by 19 cents for every dollar of revenue, paid for by a net increase in the revolver! And this is when revenues increased by nearly 25%.

This could very well be a good short. The stock is selling for $2.70 when they "earned" 2 cents in the first half of the year at the height of a great housing boom. They just announced another $5 million in financing via a new revolver with, get this, an institutional investment fund! It's convertable into shares of stock, there's a $3 million minimum (I wouldn't worry too much about that), plus there are warrants on 512K shares of stock at $3.15 which must be exercized with cash (gee, I wonder why?). The lockup ends Aug 25, 2006. The interest rate is prime plus 1.5% (can be reduced on certain events).
not interested (except perhaps to short it)

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