Pink Sheets

See the next post for summary and details (and Q2 results).
see here for a Nov 2006 update.

I keep trying to figure out what to tackle and how to tackle it with HQSM. Every time I look at a company that's not really simple, I run into the same problem. I need to get a better understanding of the business and there are two major directions that could be taken.

1. Walk the process. In other words, simply go through all the documents in some rational order, taking notes. At the end, hopefully I'll have the understanding I'm looking for. If this is going to become an investment, this is definitely the quickest and most effective direction to take because I need to go through all the stuff anyway. The downside is that I might not find an obvious showstopper until nearly all the work is done. And it could be something that would be easy to find (and quickly found) using method #2
   
2. Search through the documents looking for answers to specific questions. This is good for weeding out bad investments quickly. However, at the end of the process, I still have to do method #1 anyway.

I use method #2 for the earlier phases of analysis and method #1 for the later phases. So I guess in this case, I'm just concerned that there's some fairly blatant showstopper here. Usually when I start the final phase, I already have a good mental picture of the business. Right now, I can't say that for HQSM. I've tried looking for obvious ways to find "the big problem" without much luck. So I'm just going to dive in to method #1.

10-K
Incorporated in Delaware. Executive offices in NYC.
NOTE: Transitional Report for May 1, 2004 to Dec 31, 2004.
Incorporated as Sharon Capital Corporation in 1989 (Nevada) as a blank check company. 1990 changed to PEI, Inc. Then changed to Process Equipment Acquisition Corp (Nevada) (PEQM.OB). March 17, 2004, the Company merged with British Virgin Islands company Jade Profit Investment Limited. Company thus ended up with an 84.42% ownership in the subsidiary Hainan Quebec Ocean Fishing Company Ltd, a PRC llc ("HQOF") also here. April 2004, Company changed its name to HQ Sustainable Maritime Industries, Inc. and incorporated in Delaware, all effective in May 2004.

August 17, 2004, HQSM acquired Sealink Wealth Limited, which was a subsidiary of Sino-Sult Canada Ltd. Sealink was incorporated in British Virg. Isl. Sealink is sole owner of Hainan Jiahua Marine Bio-Products Co ("Jiahua") a limited liability company in PRC. They sell stuff like seal genitals (mmmm... seeeaaal genitals).

This purchase of Sealink (contract contract) was a related party deal (same people involved in both HQOF and SSC):

SSC [was] owned by Harry Wang Hua (51%), Lillian Wang Li (25%), and Norbert Sporns (24%) (collectively, the "SSC Owners"). Lillian Wang Li [Chairman of HQSM] and Harry Wang Hua [COO of HQSM] are brother and sister. Lillian Wang Li is married to Norbert Sporns [CEO of HQSM]. The SSC Owners are current directors and executive officers of HQSM, as well as, collectively, indirect beneficial owners of the majority of its capital stock.

The terms of the deal were:

The consideration of the acquisition is $20 million in terms of 12,698,078 shares (equivalent to $8,888,655), $11,011,345 promissory note convertible to 15,732,493 Class A shares and $100,000 promissory note convertible to 100,000 Series A preferred stock with par value at $0.001 per share. Both promissory notes accrue interest at the rate of 5% per annum. 12,698,078 shares were issued to SSC on August 17, 2004 after the Purchase Agreement was signed. And $11,011,345 of promissory notes were converted to 15,732,493 Class A shares on November 18, 2004.

Also on August 17, 2004, they bought out the rest of HQOF, with appropriate PRC government approvals. Cost was $5,695,145 cash paid on Halloween 2004.

Analysis: HQSM paid a total of $26 million for Jiahua. In the first half of 2005, Jiahua earned perhaps $1.2 million. If this can be extrapolated, then Jiahua would be worth $36 million. Jiahua requires less capital, has higher margins, and is a more profitable business. So why screw around with HQOF?

In April 2004, HQSM US was formed and registered, but was dormant. In June 2004, HQSM Canada was formed and started business development operations (sales and mktng).

Main business is

• aquaculture via co-operative supply arrangements
• ocean harvesting (aka "fishing")
  
• processing aquatic products
• production and sale of marine bio-products (like the seal genitals above) mostly in PRC.

The Hainan aquatic products processing plant was designed in Canada. The plant had 2 production lines, but that was expanded to 6: 2 filleting lines (3,000 tons/year), 2 hole fish lines of tilapia gutting, scaling, gilling (10,000 tons/year), 2 shrimp lines (3,000 tons/year). The plant has 2 shifts. They are HACCP certified for export to the US and Japan (but some other Hainan producers also have these certs*). They also have an EU Code for exporting to the EU. Only two Hainan Province producers have a code, which are supposedly difficult to get. Restricted trade is good for business insiders while free trade is good for consumers. Thank you, EU. Also acknowledged as "eco-friendly" by the Canadian International Development Agency (CIDA) which provides government-to-government aid for developing countries like China. They provided technology transfer to the business in Hainan (this one?) in exchange for "detailed environmental and social (gender) impact studies." [yeah, sure, we'll tap dance for you evangelists in exchange for your technology]

* HQSM claims that they know of no other competitor in Hainan that has a similar scale and production capacity or that has the vertical business model. Note that Hainan is the best place in China to farm tilapia because of the year-round climate.

Jiahua Marine subsidiary provides capacity to make nutraceuticals to enrich feed for tilapia and shrimp in Hainan. They're working with the US to improve the feed (health, feed conversion, meat quality, and boost their immunity to disease).

Jiahua marine bioproducts factory. Located in Wenchang City of Hainan. 180K sq ft and a construction area of about half that size. Two production lines: powder line, oil line. Jaihua has HACCP ceritification from China Entry-Exit Inspection and Quarantine Bureau.

Jiahua sales in 2003 were over $7 million, $2.7 million net profit. Sales in 2004 were higher (unspecified). Looks like only $3.2 million of the 2004 Jiahua sales were to external customers.

Jiahua research and development: Marine Organism Research Institute. Clinical trials, lab testing have resulted in National Certification for "various healthcare products". Won some awards in China. This group has a long-term relationship with Qingdao University of Oceanography (intro) (enterprises) (alumni for searching).

Chinese patents:
460000X340-2001: shark cartilage health benefits (suspicously high number of unrelated benefits).
460000x131-2001: more shark catilage stuff (same red flag)
460000x338-2001: shark liver oil
460000x342-2001: shark liver oil for nursing mothers
"The above products have been shown to be effective."

Jiahua has adopted a sales strategy of large scale tours in popular tourist areas. Products started selling in Hualian Supermarket Co. (1200 outlets, $2 billion in sales)

March 2005, Jiahua finalized an agreement with American River Nutrition providing HQSM with technology (for boosting immune system of shrimp). ARN is also into stuff like this (which, in March 2005, is HQSM's entry into the North American market for voodoo medicines... that's just what I call it)

DeltaGold® is a registered trademark of American River Nutrition, Inc. and is protected by US Patent no: 6,350,453 and patent pending application No: US 2005037102.

Nine people in Jiahua sales and marketing, led by Harry Wang, COO [you were thinking of some culturally insensitive snide joke, weren't you?].

There are some barriers to competition due to the high cost of infrastructure (but it's clearly not all that high).

In 2001, HQOF was recognized as a "Leading Agriculture Enterprise" by Hainan Provincial Government, which helps at trade shows such as the Boston Seafood Show (which I just missed, it was in October).

There are "significant" economies of scale with HQSM. R&D and QA can monitor larger operations without new hiring. Larger buy orders can be made with long term supply orders. They made an odd statement: "Large buyers are able to sole source instead of having to group supply from various producers...."

April 2001, they received the "New/high tech Enterprise of Hainan Province" award by Hainan Provincial Technology Authorities.

Jan 2003, they received the "Industrial Enterprise of the Province"

2002, they were named "Leading Agriculture Enterprise" for both Hainan and Wenchang provinces.


March 2005, they received the "prestigious China Excellence Award" for health product excellence and advancement of of China business practices, by the China Association of Entrepreneur Foreign Investment (CAEFI), can't verify.

HQOF and Jiahua together have 434 employees, all full-time, mostly in Haikou, PRC. The rest are in Wenchang, PRC.

The land is rented from PLA Haijun No. 4802. Lease expires in 2009. Rent in $26K per year. The health and bio-product processing factory costs $81K for 50 years (from 2000). There's a coconut producer on the same road as the factory.

No material legal proceedings.

Stock transactions:

• March 17, 2004: issued 21 million shares, 27 million warrants (zero price) due to lack of enough authorized shares (they did get shareholder approval for the additional shares), in reverse merger. All warrants were exercized.
• May 28, 2004: issued 18,600 shares and 150,000 warrants to Consulting for Strategic Growth 1, Ltd. for PR services. Also 900 shares to Bonnie Barrett Stretch, a related party of CSG 1.
• May ?, 2004: extended maturity date of $255,422 principle of convertable notes to May 2005. No idea where that fits in here.
  
• August 17, 2004: acquired Sealink from Sino-Sult Canada. 12.7 million shares (worth $8.9 million) + remainder of $11.1 million in a promissory note. I already covered this earlier.
• August 31, 2004: issued 35,411 shares to 3 people for $24,508. (69 cents/share)
  
• Oct 2004: issued 570,351 shares to 19 people for $217,340. (38 cents/share)
  
• Nov 2004: issued 641,169 shares to 26 people for $177,737. (28 cents/share)
  
• Nov 18, 2004: issued 89,285 shares to the 3 independent directors.
• Dec 2004: issued 919,964 shares to 29 people for $285,286. (31 cents/share)
• Dec 1, 2004: issued exact same shares as on May 28 to CSG 1 again.
• Dec 1, 2004: issued 520,685 shares to some western financial advisors (from reverse merger)
• Dec 22, 2004: issued 18,750 shares and 50,000 warrants to CSG 1 again.

The fiscal year has been changed from April 30 to Dec 31 (reason for the transitional report).


Jiahua contributed $3.2 million to sales. Gross margins were 83%. Advertising costs were 52% of sales. Net income was $1 million. This was August 17, 2004 to Dec 31, 2004. This would annualize to sales of $8.5 million.

The original fish farming sales were $17.5 million for the 8 months of 2004 (was $10.8 million during the same 8 months in 2003). Gross margins were 14% during 2004, but 31% during 2003. They intentionally pushed gross margins down in 2004 to attract customers and make up for lost revenue, also the supply from local fishermen dropped significantly due to frequent bad weather in Hainan causing higher supply costs. Net profits were $2.8 million in 2004 ($490K in 2003). Um, where's the SG&A? Why are(n't?) gross profits higher than net profits?

Selling and distribution costs were $331K or 1.6% ($474K or 4.4% in 2003).
Advertising costs were $1.7 million or 8% (zero in 2003).
G&A was $1.9 million or 9% ($672K or 6% in 2003).
Depreciation $509K ($210K in 2003).

Provision for bad and doubtful receivables zero ($800K in 2003). Debts were slowly recovered during the shutdown but all debts were collected afterward, and all receivables are now current so they used zero provisions here. NOTE 3P boilerplate really contradicts what they're saying. Not to mention...

From Wiley GAAP 2002:

The recording of a valuation allowance for anticipated uncollectable amounts is almost always neccessary. The direct writeoff method, in which a receivable is charged off only when it is clear that it cannot be collected, is unsatisfactory since it overstates assets and results in a mismatching of revenues and expenses. Proper matching can only be achieved if bad debts are recorded in the same fiscal period as the revenues to which they are related. Since the amount of uncollectable accounts is not known with certainty, an estimate must be made.

There are two estimate techniques:

• percentage-of-sales method: best for matching revenues and expenses, uses historical overall data
  
• aging-the-accounts method: best for presenting the correct realizable value of the receivables, uses customers' specific historic data and age of each debt

The direct writeoff method is used for income taxes, but not for GAAP accounting.

The giant increase in "other income" is due to large bad debt recovery. I'm not sure if such as large percentage should still go on other income or if it's an extraordinary event. I treat it as extraordinary, myself.

No income taxes. Deferred tax for the period was $194K (vs $120K), the increase due to timing of provision for bad debt being eliminated and recovery of bad debt.

Liquidity: financing has normally been done via operations. This should be sufficient, except for temporary periods of rapid growth. The decrease in the current ratio is mainly due to buying out the minority interest in HQOF.

Most important of the risks, in my view:

• The current rapid growth could put a significant strain on management and the organization. Growth requires training.
  
• Dependence on key employees
• No product liability insurance
• Typhoons
• Any sort of trade sanctions by the US (such as the stupid shrimp tariff of 2004)
  
• Increased competition

It's worth noting there that HQOF and Jiahua are Foreign Investment Entities (FIEs) and subject to restrictions in foreign exchange. They are permitted to exchange current account items and after-tax dividends. But things are never without exceptions.

Auditors are Rotenberg & Co of Rochester, NY. The report is dated March 16, 2005. There are no qualifications. These auditors are not on the list of top auditors of SEC clients. They audited or are auditing CHFI (which I looked at earlier, can't find them elsewhere other than the FAQ), OZLU (OTC BB, seems ok), ZEOM (OTC BB), Epsey Manufacturing & Electronics Corp (ESP), Contact Capital Group (which seems kind of scummy).

Rotenberg & Co replaced Baum & Co who resigned. Baum had their own issues with the Public Company Accounting Oversight Board. Numerous infractions.

Current assets are half trade receivables and nearly half cash. Very low inventories. $389K due from related parties (net of provision???) So they have a provision for a related party but not for customers? You'd think that you'd know which related parties were trustworthy/solvent and which ones aren't. Another $27K advanced to an employee.

Current assets: $4.6 million
Trade receivables: $5.4 million
Deferred taxes: $1.2 million
Total assets: $21 million

Current liabilities: $9.2 million (about half accrued expenses, half bank loans)
Total liabilities: $9.3 million
Equity: $11.6 million

The "8 Month Results" above are really better than looking at the consolidated results. And 2004 was a weird year for them. Can't really compare 2004 with 2003 (and 2005 won't be very comparable to 2004).

Sales: $21 million
Gross profit: $5 million
Selling: $331K
Advertising: $1.7 million
G&A: $1.9 million
Deprec: $509K
NO PROVISION
Finance costs: $400K
Other income (recovery of bad debt): $2.6 million
NO INCOME TAXES PAID
Deferred tax: $194K
Minority interest: $235K (goes away in 2005)

Share count at end of year is 95 million (it's now over 100 million).
25 million on April 30, 2004
Issued 70 million during 2004 (plus warrants, see Stock Transactions above)

A realistic bottom line would be to add at least $400K for provision for doubtful accounts, remove the $2.3 million of other income and put it into some extraordinary category. This would give them a net loss from operations of about $182K. This isn't so bad because they had shut down for part of the year.

I truly don't understand one part of the financial statements. On the equity statement, they issued 70 million shares which raised the paid-in capital by $22.5 million. Then they subtracted the exact same amount as "Adjustment from acquisition of Assets under cost basis", which essentially means they paid $22.5 million for something worth zero? It was all goodwill, but that goodwill doesn't show up on the balance sheet.

If we look at the cash flow statement for 2004, everything in operating activities looks normal except for a $22.5 million negative which results in about $18 million used in operating activities. Wait a minute, that wasn't operating activities, it was investment or at least finance.

Finance produced $20,755,288 as "proceeds from common stock". But this was wiped way by "Goodwill adjusted for reorganization process" of $22.5 million. I don't understand how operations destroyed $22.5 million. If you flush $22.5 million down the toilet, isn't that investing activities?

Capex was $6 million. But there's an entry outside of capex called Acquisition of PP&E. How is that not "capital expenditure"?

They received $1.2 million in cash from an acquisition along with $409K in PP&E.

Trade receivables on the balance sheet increased from $2.4 million to $5.4 million. In cash flow from operations, they subtracted $2.54 million as a decrease in provision for doubtful account. But there's also an entry for "trade receivables, net of provisions" of $3.8 million. I hope the "net of provisions" really applies to 2003 and that it's zero for 2004. But there's something really, really weird: the decrease in provision for doubtful account in 2004 is $2,535,047. There's also a decrease in provision for doubtful account in 2003 for $2,535,047, the exact same amount!! This is Fouled Up Beyond All Repair: FUBAR.

I can't understand this financial statement. Maybe it's just me, but how could they possibly have a change in provisions two years in a row of exactly the same amount down to 1 part per 2.5 million?

The $100,000 promissory note (which is also listed in the supplemental disclosure of non-cash investing and financing activities) is listed in the cash flow from operations. This seems like it's definitely finance. Didn't I cover something exactly like this recently? Another Chinese reverse merger had an issued note payable under operations.

I suspect it's very difficult to put together an 8-month transitional financial statement. You have to compare two different 8-month periods with a gap of 4 months in-between that you must somehow deal with. I don't see how this could pass an audit. Rotenberg & Co expressed their opinion for both periods of the cash flow statement. And NOTE 2 states that the statements are prepared according to US GAAP.

Depreciation schedules (straight line)

• buildings and leasehold improvements: 11 to 44 years (leasehold improvements must further be limited by the lifetime of the lease, which isn't mentioned)
• plant and machinery: 5.5 to 11 years
• motor vehicles: 5.5 years
• office equipment and furniture: 5.5 years

Taxes accounted for by liability method.
8.3 renminbi to the dollar.
revenue recognition is when merchandise is shipped, title passes, and collectability is reasonably assured.
$175K shipping and handling in 2004 ($290K in 2003), included in selling and admin expenses.

Fish farmings sales in 2004: $17.5 million
Selling: $303K
Advertising: $0
Finance costs: $156K
Profit before tax: $3.24 million
Tax: $194K
Net Profit not including G&A: $2.8 million

Health and bio-products sales in 2004: $3.24 million
Selling: $28K
Advertising: $1.7 million
Finance costs: $50K
Profit before tax: $1 million
Tax: $0
Net Profit not including G&A: $1 million

G&A: $1.9 million
Finance costs not associated with segments: $194K

Note 3Q: They mention SFAS 149 which makes changes for derivatives and hedgding. They aren't using any of this, so they should make a statement saying this has no material impact on financial statements [of the future]. But they say nothing: not even that it's being evaluated. They do say the right thing about SFAS 150 and derivatives. Also for the other accounting pronouncements.

NOTE 4: Trade Receivable
Jan 2004 starts off with $829K allowance for doubtful accounts.
$1.5 million is added to this during the first 4 months of 2004.
April 30, 2004: allowance = $2.35 million
This is entirely written off during the last 8 months of 2004.

This makes the duplicate numbers for 2003 and 2004 in the cash flows even more bogus.

Dec 2004 PP&E is mostly plant and machinery ($8.5 million) with some buildings and leasehold improvements ($2.8 million).
April 2004 PP&E is nearly all plant and machinery ($3 million).

Gross PP&E increased by $8.2 million during the last 8 months of 2004 to $11.5 million.

Depreciation is nearly all plant and machinery.

Three expired bank loans (all secured by fixed assets):

1. $1.8 million (6.588% interest)
2. $964K (6.588% interest)
3. $1.7 million (5.04% interest)

Currently negotiating with bankers to extend these loans.

PRC Taxes (no tax benefit or burden for US):
Statutory rate: 15%
Tax holidays and concessions: (7.5%)
Effective rate: 7.5%

Deferred tax asset (liability method):
Jan 2004: $1.426 million
April 2004: $1.403 million
Dec 2004: $1.209 million

PRC reserves: $1.1 million (vs $957K in April 2004). Can't make any cash distributions until these are satisfied at the discretion of the board of directors as per PRC GAAP. If the statutory reserve reaches 50% of the registered capital of the company, then the reserve doesn't increase any more.

Stock option plan:
Dec 2, 2004 non-qual plan approved
$0.28 strike price, 10 year expiration, immediate full vesting
Norbert Sporns: 500K
Lillian Wang: 500K
Harry Wang: 500K
Fusheng Wang: 1 million
CFO Dallaire: 200K, 1/3 vested per year
5 million more reserved
Total dilution from stock options is 7.5 million

Credit Risk:
Top 5 customers accounted for 57% of AR (15.9% of sales, 12% of sales, 10% of sales), aggregate of 38.5% of sales.

No legal proceedings

Norbert Sporns <== married ==> Lillian Wang Li <== sister/brother ==> Harry Wang Hua
Fusheng Wang == father ==> Lillian and Harry Wang

Fusheng Wang is Honorary Chairman and received 1 million options

Lillian Wang Li, 47, Chairman of the Board ($187K) owns 18.3% of the company via Red Coral Group Ltd. (no website)
HQSM founder. 25 years in management of Chinese and Canadian businesses. Graduated Beijing Univerisity (Euro and Chinese lit), Certificate of BA Concordia University in Canada.

Harry Wang Hua, 41, COO, Director ($150K) owns 37.3% of the company
HQSM founder (esp operations). Civil engineer, Beijing University. 15 years in startup company management in China and Canada. Also many years training Chinese middle managers in Western standards.

Norbert Sporns, 50, CEO, Director ($150K) owns 17.6% of the company
HQSM founder (from 1997). University of British Columbia (philosophy), bachelor of civil law degree and bachelor of English common law from McGill. Certificate of Tax Law, Certificate of Condominium Law, Diploma of Notarial Law from University of Montreal.

Jean-Pierre Dallaire, 53, CFO, Director
Fusheng Wang, 71, Honorary Chairman, Director
Jacques Vallee, 52, indpendent Director
In charge of business development and financing with Altitude Consulting Group (no website). MBA Sherbrooke. Advanced Certificate in BA from University de Quebec a Trois Rivieres. Post-grad level Advertising Mgmt Diploma from Ecole des Hautes Etudes Commercialese (Montreal). 30 years mgmt experience. Bank of Montreal and other places.

Fred Bild, 67, independent Director
Visiting professor at University of Montreal's Centre of East Asian Studies. Private consultant on political and economic relations with China and East Asia. Has been Ambassador to various countries from Canada.

Daniel Too, 52, independent Director
Grad of Hong Kong University and Polytechnic. Managing Director of Delta Elevator Far East. Director of Voker Chemical Paint Ltd. (no website)

He Jian Bo, 37, Manager Finance Dept.
Bachelor's and Masters in economics from Southwestern University of Finance and Economics, PRC. Joined HQSM in 1999.

Liam Haniffy, 37, Sales and Quality Production Mgr

Wang Fu Hai, 60, Chief Production Controller
Chief Production Controller and Engineer at HQSM. Joined HQSM in 1997.

Barron Partners LP owns 3.6% of the company.

All executives and directors own 73.28%.

UPDATE: Rotenberg and Co. gave an unqualified audit opinion on what seems like either outright fraud or else extremely unethical.

UPDATE Dec 21, 2005: There's just too much red here, too many red flags.

HQSM (yahoo, website) is involved in ocean fishing, fish farming, and fish processing. They have 4 ships. They also have a deep sea duty-free port (the only foreign joint venture in China to have one). They continually pass USFDA inspections. Sales and marketing covers the US, Canada, Japan, Korea, China, and Southeast Asia (offices in NYC, Montreal, Beijing, Shanghai, and Haikou). They participate in international seafood shows in Boston (I didn't see them on the list of exhibitors), LA (they're on the list), and Shanghai.

Chinese language website (not linked by the English website). Some various seafood companies.


A NOAA presentation on The Aquaculture Revolution, very good stuff. It has a great chart showing Chinese dominance of the tilapia aquaculture market. And the next chart shows the amazing growth of the market itself. Very exciting stuff.

Many aquaculture species, such as catfish and tilapia, are grown almost entirely on vegetable-based feeds....

They warn that just because people aren't eating a particular fish today, doesn't mean they won't be eating it tomorrow. They give tilapia as one example of that.

Here's a presentation by Kevin Fitzsimmons; President, World Aquaculture Society; Professor, University of Arizona; Sec./Tres., American Tilapia Association. Consumption of talapia just continues to climb. At least $317 million of sales in 2004. It claims prices have been stable for several years (and will continue to be stable) but will not go up with inflation.

FAQ
They have 10% of the market for Chinese tilapia fish sold in the US (the US is the largest market for tilapia). The market for tilapia in the US has grown from $20 million in 1992 to $173 million in 2002. China produces 47% of the world's tilapia. HQSM said that in 2004, demand for their product was 4 times greater than capacity. So they're trying to rapidly increase capacity. They're creating a fish feed plant to control quality of food to fish suppliers in Hainan and consolidate the relationships. Also developing "organic" products for certification and a price premium. They're doing mergers and acquisitions, claiming to choose carefully.

Our main marketing offices are currently in Beijing and Shanghai. More than half our products are exported to the U.S., Australia, South Korea, Japan and other Asian countries. Some of these exports are sold under the buyers' brand names. In addition, we have long-term business relationships in Canada, Germany, France, Belgium, and Spain. We regularly attend major International Food Shows in Boston, Los Angeles, Shanghai, Beijing, Singapore and Brussels. I believe we are the only PRC based integrated producers present at these shows. We also work with such leading U.S. distributors as Beaver Street Fisheries (they carry tilapia), Slade Gorton (tilapia), Paragon Seafood Company tilapia, Crocker & Winsor Seafoods (tilapia), Mareida Trading Co., and Tomich Brother Fish Co.

From Slade Gorton:

Tilapia has a long shelf life when fresh, as a result of tightly regulated harvesting, processing and shipping processes. Water quality and high-grade feed are the keys to raising premium tilapia. Tilapia act like sponges, taking on the flavor of the environment they are harvested in. As such, tilapia raised in cement tanks are generally better tasting than those raised in ponds which may take on a muddy or gritty flavor.

They're located Haikou, the chief city in the province of Hainan, which is an island in the extreme southern part of China (which forms part of the Gulf of Tonkin with Vietnam).

AmeriCulture is a fish farm for tilapia. They're not a public company, unfortunately.

FDA fish finder.

Looking at the 10-K (See 10-K posting for better details)
US Dollars
In the 8 months from May 1, 2004 to Dec 31, 2004 (audited US GAAP)...
Aquatic activities nearly stopped during 2004 due to renovations. The health and bio-product segment was acquired in August 2004. So these numbers are fairly meaningless.
Sales: $20.8 million
Gross margins: $5.1 million (24.7%)
Large advertising and G&A costs
Operational income: $758K (3.6%)
Net income is greatly distorted by a one-time other income
Removing the one-time income but keeping all taxes (which actually seems correct based on a sanity test), net income is $564K
Outstanding shares: 95,055,123 on Dec 31, 2003 (which is WAY more than the weighted ave given due to 70 million shares issued to raise $22.5 million dollars)
(there's something funky going on with a gigantic writedown of assets related to goodwill but not really showing up normally on the balance sheet)
Net income per share for last 8 months of 2004: 0.6 cents per share (i.e. a bit over half a cent)
This would correspond to little less than a cent per for a year.

The cash flow is also very odd due to the funky issue above. Without it, cash flow would look good, with a significant investment going on.

Let's jump ahead to Q2 of 2005, ending June 30, 2005.
100,261,523 shares outstanding on that date.
For three months:
Sales: $6.5 million
Gross margins: $2.8 million (43%) Warning: Jiahua Marine had 82% gross margins while "aquatic products" had only 18% gross margins (and gross loss during the same time in 2004).
Operational income: $1.3 million (17%) with no provision for doubtful accounts
Taxes are only $97K (special economic zone, which is not guaranteed in the future)
Net income: $1 million (1 cent per share) However, with a normal provision it would be closer to $750K, so earnings per share are probably something like 0.75 cent (three quarters of a cent). This is with a low tax rate. There's also $200K of other income.

But the cash flow is destroyed by increase in AR ($1.5 million!), decreases in AP ($626K). Operations burned $1.2 million in cash!

More financing by issue of stock: $619K
There's now just over 100 million shares.

1. The seafood business is definitely low margin. Don't expect any operational leverage as it scales. Every dollar of revenue gain will probably only fetch 16 cents? Are there efficiencies to be gained? That's the real question to be answered when I do the detailed work. [answer: some, but not a lot]
   
2. The fish market looks like it will definitely expand as the US and probably other countries continue eating more of this fish I had never heard of before (but then I hate seafood).
3. They seem to be in a fairly dominant position in the market and that is very likely to continue.
4. They seem to have big accounting issues.
   
5. Based on $750K earnings per quarter and 100 million shares, I'd say it's worth about 50 cents.

Q1 10-Q
8/5/2005 8-K increased authorized share count (for split), also ameded by-laws for AMEX rule
7/25/2005 8-K moving to AMEX
7/22/2005 8-K insanely confusing 5-for-4 stock split (why frickin bother?)
2004 proxy
2004 10-K

Get a load of the ownership chart near the beginning of the 10-K. Zillions of subsidiaries within subsidiaries.

1996 reverse merger.

The foundation of the group of companies... was laid in the early 1980's when Cheng Chung Hing, Ricky formed Man Sang Trading Hong, a freshwater pearl trading company, and Cheng Tai Po formed Peking Pearls Company, a Japanese cultured pearl trading company. As the business of the Group developed, Man Sang Jewellery Company Limited ("MSJ") and Peking Pearls Company Limited were formed in Hong Kong in 1988 and 1991, respectively, to continue the trading operations of the Group.

Subsequently, the Group expanded its operations to include pearl processing with the establishment of Man Hing Industry Development (Shenzhen) Co., Ltd. ("Man Hing") in 1992 to process and assemble freshwater pearls and Chinese cultured pearls, and Damei Pearls Jewellery Goods (Shenzhen) Co., Ltd. ("Damei") in 1995 to assume and expand the Chinese cultured pearl processing operations of Man Hing. In view of the continuous expansion of Chinese cultured pearls business, in December 1996 the Group set up a subsidiary, Tangzhu Jewellery Goods (Shenzhen) Co., Ltd. ("Tangzhu") in the PRC to specialize in purchasing and processing Chinese cultured pearls of larger sizes with diameter from 6mm and above and, to a lesser extent, in processing other cultured pearls. As a result, Damei started to concentrate on the purchasing and processing of cultured pearls of smaller size with diameter below 6mm. The business of purchasing and processing of Chinese freshwater pearls was also transferred from Man Hing to Tangzhu whilst Man Hing started to concentrate on the pearl jewelry assembling business.

Ya got that?

An insane number of changes happened over the years. But let's skip to the pearl industry discussion.

Pearls

• freshwater, PRC big supplier: small 5-7mm low margin pearls, larger high margin pearls
  
• saltwater cultured, Japanese (losing market share due to poor harvests)
  
• saltwater cultured, Chinese emerging as a major supplier, improving quality
  
• saltwater cultured, Tahitian and South Seas: more expensive category by itself
  

Seven product lines:

1. Freshwater (US$2 to US$1,000 per 16 inch strand)
   
2. Chinese cultured (US$10 to US$400)
   
3. Japanese cultured (US$100 to US$2,000)
   
4. South Sea (US$300 to US$70,000)
   
5. Tahitian (US$150 to $15,000)
   
6. Pearl jewelry
   
7. Other jewelry products

Company buys pearls from pearl farms with full-time staff working with farms. No long term purchase contracts. Top 5 suppliers accounted for 53.5% of sales, largest is 14%.

Let's stop here and look ahead at the rough numbers....

They earned about US$0.38 in 2005 (excluding a huge gain on sale of real estate), making them perhaps worth $5.70. The stock is selling for $5.60 Yahoo lists them as having a P/E of 10, although it's really probably closer to 15. But I don't know about the weird stock split.

Looking at their Q1 balance sheet, it's very strong. They earned 9 cents diluted in Q1, but cash flow from ops is terrible due to the usual suspects.

This one is worth following.

Back in 1984, HIA acquired CPS, which is now a hundred-year-old company selling well water equipment in Colorado.

Revenues have been remarkably stable between $31 and $33 million going back to 2000. Net income has steadily increased from $378K to $809K in 2004. Per share earnings went from 4 cents in 2000 to 8 cents fully diluted in 2004.

Directors and officers own 77.6% of the business.
Carl J. Bently, 71, (Chairman since 1996) owns 25%
Alan C. Bergold, 56, (President since 1996) owns 30.1%
Donald L. Champlin, 53 (Executive VP since 1996) owns 25.8%
these include only a small proportion of stock options.

Unqualified auditor opinion from Hein & Associates of Denver.

Current assets are inventories and AR, steady from the year earlier.
$8 million current assets, $1.4 million net PP&E, $1.2 million goodwill.
Current liabilities are mostly line-of-credit, accrued payroll, AP, construction loan, etc.
Current ratio is a little less than 2.
Very little long term debt.
$5.9 million equity, $11 million assets.

Gross margins are consistently around 30%.
Operating margins are consistently around 4%.
Income taxes consistently between $400K and $500K.
Net income was $809K (vs $720K in 2003, $696K in 2002)
The increase from 2003 was due to a number of ordinary factors.

Share count has decreased over the years from treasury stock purchases.

Cash flow from operations shows lots of cash produced in 2002 and a big investment of $1.3 million in 2004. From 2002 to end of 2004, cash flow from ops matches earnings with the exception of the large investment.

Lots of flow out-of and into the line-of-credit, roughly $9 million to $10 million per year.
Long term debt interest rate is 8% and 8.125%.
Maturities are well staggered so that no year has more than $158K maturing.
Operating lease obligations are $939K in 2005 and decreasing significantly from there.

Tax benefit of $26K in 2004 and $36K in 2002.

750K options outstanding end of year 2004.
9,273,435 shares outstanding end of year 2004.
Total diluted shares is around 10 million

In Q2, both inventories and AR increased dramatically over 80%!
net PP&E jumped from $1.3 million to $4.4 million (goodwill remained unchanged)

Sales increased slightly in Q2, but more in Q1. Gross profit is down. Operating income is down. Net income is down. All of this is both for 1st half and Q2. This is all due to competitive pricing pressures from national distributors. The increase is sales is due to general economic conditions in the region.

The company is doing a reverse stock split in order to go dark. Here's their discussion of it.

we anticipate that there will be eight remaining owners of HIA stock, consisting of HIA’s three directors and principal shareholders, Carl. J. Bentley, Alan C. Bergold and Donald L. Champlin, as well as five other HIA employees. The remainder of the shareholders, including all of the public shareholders of HIA, will own fractional shares for which they will be entitled to receive cash at the rate of $0.60 per pre-split share....

In order to free HIA from the obligation of public reporting, we only need to reduce the number of shareholders to less than 300. However, we thought it would be unfair to the public shareholders to leave some of them in the position of holding stock in a private company which had no obligation to make information publicly available and no semblance of a public market. Accordingly, we concluded that it was preferable to do the reverse split on a basis that cashed out all of the public shareholders.

Decent people, right to the end.

The latest ask on the stock is 60 cents, so no chance of arbitrage. This one is truly going private. Adios.

10-K
Year ending: Dec 31, 2004
11.2 million shares at March 9, 2005
incorporated: Tennessee
offices located: Ooltewah, Tennessee (outside Chattanooga)
Was on the NYSE.

World's largest manufacturer of vehicle towing and recovery equipment (which is installed on 3rd party truck chasis). Disposed of all towing services business around 1997. Sold via 120 independent distributors for US, Canada, and Mex. and 50 distributors covering other countries. Jige subsidiary in France. Beniface subsidiary in UK. 65% of distributors sell MLLS on an exclusive basis. MLLS has some independent commission-based sales reps covering specific territories. They have demo units available.

No single distributor accounted for more than 5% of sales.

Wreckers: from conventional tow trucks to large recovery vehicles with 70-ton lifting. Various special features available ("Express" automatic wheellift allows operators to get a vehicle without leaving the truck cab.

Car Carriers: flat bed trucks.

Multi-Vehicle Transport Trailers: those open air trailers with upper and lower decks. 6-7 cars (can get up to 8 with speical cab rack).

Brands
Century: top of the line. started in 1974. 8-70 ton.
Vulcan: light and heavy duty wreckers, sold via distributors
Challenger: 8-70 ton wreckers, car carriers. started in 1975.
Holmes: mid-priced wreckers 8-16 ton. car carriers. started in 1916. well recognized brand.
Champion: started in 1991. Low priced car carriers. Expanded in 1993 to include cheap tow trucks.
Chevron: car carriers, light duty wreckers. Operated autonomously with its own distribution network in the salvage industry.
Eagle: light duty wreckers, acquired, "Eagle Claw" express hook-up system, patented in 1984. Designed for the repo market. Upgraded and expanded after acquisition.
Jige: light and heavy wreckers and car carriers for Europe.
Boniface: heavy duty wreckers in Europe. Long underlift technology for European tour buses.

Four major innovations in the industry (associated with Holmes and Century).

1. Rapid reverse winch
2. Tow sling
3. Hydraulic lifting mechanism
4. Underlift with parallel linkage and L-arms

Much of the patent IP has expired and the rest will expire within the next few years. They've successfully defended their IP in the past.

Six manufacturing plants in US, France, and UK.
Oolteway, Tenn (242K sq ft)
Hermitage, PA (95K sq ft)
Mercer, PA (110K sq ft)
Greeneville, TN (112K sq ft)
Lorraine region of France (180K sq ft)
Norfolk, England (30K sq ft)

They purchase components such as hydraulic cylinders, winches, valves, pumps. Either MLLS installs it on the truck chassis, or it's shipped and installed on-site. MLLS only applies primer coat so the buyer can paint is as desired. Painting before delivery is done by outside paint shops.

No supply issues.

In 2002, the board decided to sell the distribution group. Only one remained (in BC Canada) at year end 2004. It will be sold quickly. Accounted as a discontinued business.

Barriers to entry into the business are actually low (which is bad). Technologicial capabilities are becoming more important (which is good).

840 employees. No unions (except for the usual nasty governmental stuff in Europe).

Market:

• light duty wreckers: pro-wrecker operators, repo, municipal, federal agencies, repair shops, salvage.
• heavy duty wreckers: pro-wreckers for commercial vehicles
• car carriers: auto salvage, [expanded into] equipment rental, tow operators who want to expand towing capabilities.

30,000 towing operators
80,000 service station, repair shop, salvage operators.

MLLS is the official recovery vehicle for: Daytona, Talledega, Atlanta, and Darlington NASCAR. Grand Prix Miami, Suzuka in Japan, Rolex Daytona 24 Hour Race, Molson Indy, Brickyard, and the Indianapolis 500 (and others).

Virtually all products are based on orders, not for general inventory.

Issues:
Expiring IP (I expect profits to drop by some unknown amount, depends on their current margins and whether they're gouging for profits today).

Large debt, credit facility expired in July 2005, but they entered into another one with Wachovia: $20 million revolver at LIBOR+(1.75 to 2.5), plus a term loan of $7 million at same rate. Revolver expires June 08, term loan expires June 2010. Junior term loan by William G. Miller (owns 20% of the business) of $5.7 million, matures Sept 2008, rate of 9%.

Retaining some liabilities in tow services businesses sold off.

Officers and Board:
William G. Miller, 58, Chairman since 1994 and co-CEO since 2003 and from 1994 to present (as co-CEO with two others including Badgley), owns 20%, (Team Sports Entertainment CEO only during 2002). Was also head of Miller Group in early 1990s.

Jeffrey Badgley, 52, President and co-CEO since 2003, president since 1996, director since 1996. Various titles. President of Miller Industries Towing Equipment since 1996. VP of sales and marketing for Challenger Wrecker Corp from 1982 until joining Miller Industries Towing Equip Inc.

Frank Madonia, 56, Exec VP, general counsel since 1998. Was also general counsel at Miller Industry Towing Equip Inc. Was general counsel at Flow Measurement from 1987 to 1994. Before 1987, he was in various legal and mgmt positions for US Steel, Neptune International, Wheelabrator-Frye, and Signal Companies (Note: Miller was also at those same companies).

J. Vincent Mish, 54, Exec VP, CFO since 1999 and 94-96, president of Financial Services Group. Also a VP of Miller Industries and Miller Industries Towing Equip. Also at Flow Measurement. Worked at Touche Ross & Co for 10 years, CFO of DNE Corp 1982 to 1987. Member of AICPA.

Ownership from proxy statement:
William G. Miller: 17.9%
Ashford Capital Mgmt: 12.7%
Various interlinked investment firms: 7.9%

Compensation:
Miller: $180K no options or bonuses, total options=0 (wow!)
Badgley: $276K plus 100K options, total options=155K
Madonia: $196K plus 30K options, total options=70K
Mish: $176K plus 30K options, total options=54K

No significant legal proceedings.

De-listed from NYSE due to a lack of sufficient equity and low market cap. Company restructured, converted debt into equity with shareholder approval, disposed of towing services. December 2004, NYSE moved MLLS into a company in good standing. Need 12 months of good standing to return to NYSE.

Revenues have been fairly steady around $200 million. Was $192 million in 2003 and $236 million in 2004. The increase was due to increased demand due to market conditions.
Operating margins excluding SG&A are low at around 13%.
Net margins are 3.2%. Earned 64 cents from continuing operations in 2004, 22 cents in 2003, 34 cents in 2002. In 2004 the tax rate was only 9.3%.

This is already not a particularly strong business. If Korea or China jump into this business, it's all over for MLLS.

Auditor is Joseph Decosimo and Co in Chattanooga. Audit opinion contains a qualification that they changed their accounting for intangibles in 2002 (was that the discontinuation of goodwill amortization? If so, that's a strange qualification to add)

Balance sheet current ratio is close to 2, but it's still fairly weak. Current assets are mostly AR which incrased in 2004. So did inventories. PP&E is fairly small.

Cash flow from operations is terrible due to AR and inventory increase.

I'm scaling back on detail now because this is looking fairly bad, but mostly because of the reason listed at the bottom of the post. But let's see what Q2 looks like.

Q2 results

Holy cow, AR climbed by 31% from year end 2004! Inventories went up a bit, too. However, AP went up 29%. So I'm expecting significantly higher revenues.
Yes, revenues went up 56%! Net margins are up to 5.5%. They earned 46 cents diluted in Q2 vs 19 cents prior year.

Increase in sales was due to general market conditions and to delivery to the Australian military and production of mobile communications trailers for DataPath. Also helped by price increases in 2004 (good sign of pricing power).

Results were better during Q1 (revenues up 60%).

Cash flow from ops still stinks as they seem to be selling stuff for IOUs.

Ok, so do we value this business at $19 assuming the last 6 months is the reality of the future? What about Korean and Chinese entry into the market? Will that happen?

The stock price right now is around $18 so this was a waste of time. I had looked into it trying to figure out why it looked like two different companies. It was two different companies. MLLS is Miller Industries the Florida real estate business selling for around 12 cents. MLR is Miller Industries the Tennessee tow truck maker which is earning around 64 cents a share in the first half of 2005. Unfortunately, this isn't some deep discount business.

HOOB, Holobeam. Real estate and surgical staples. I believe I've looked at this business before, unless there are two companies dealing with real estate and surgical staples. They earn a pretty solid 60 cents a share. An OK balance sheet. Cash flow from ops is good. 2005 looks as good or better than 2004. It's selling for $41 per share which probably means that they have hidden value in the balance sheet.
possibly worth looking into further, but unlikely to be all that cheap

HYDI, polymer R&D for medical, commercial, cosmetics, and vet use. They license to 9 companies.

Solid balance sheet. Steady revenues. High gross margins (of course). Very low net margins. Some stock options. Earned 6 cents in 2005 (5 cents in 2004). Cash flow looks good.

So maybe they're worth 90 cents. They're selling for $1.15.

HWWI, A French company making breast implants and other implants(?). First to market with saline implants. Revenues increased over 15% in 2005. Gross margins are over 50%. Earned $881K in 2005 (lost a masive amount of money in 2004, looks like a doubtful account). Earned 5 cents for the year. Cash flow is ok.

Balance sheet is ok, but not much equity. So it might be worth 75 cents, maybe more. Selling for 80 cents.

MNRD, interesting, but they have 28 million shares priced at $1.80 for a
market cap of $50 million. Their annual revenues are only $8 million. So
the price already assumes a great deal of success.

DYSL, might be interesting

HRBN, they have amazingly high profit margins looking at the numbers in the latest quarter. Balance sheet is very PP&E heavy, but almost no liabilities. Cash flow isn't so great, but it's hard to tell with the weird ramping up in such little time. Oh goodie, another Chinese reverse merger. A linear motor company. Earned 17 cents in Q2. Maybe it's worth $1.80. It's selling for $4.60.

DWVS, The stock is probably priced about right, but I'll probably look into it some
time.

DYHP, Not too interesting, but they're growing fast and I'm not sure what they're
worth yet.

DTGLF, not profitable lately, maybe worth 15 cents, selling for 21 cents.

FAME, seems like a good business, but it's selling for about what it's worth.

GACF, Reasonable company in the airplane repair business, rapidly growing, but
priced about right for its current business level.

GBEL, Real estate business, priced about right.

GARM, Struggling recycle business that could be a wildcard.

DAAT is good.
DAOU passes because they made money in 2003.
DDSI is not good because current liabilities are greater than total assets AND
there are no earnings in the annual AND there are no earnings in the most
recent quarter.
DEWY is good.
DFNS is good.

DNII, The company is a mess, but not that much of a mess. I can't tell what price
it's trading at, but it might be cheap (it's listed at 5 shares for a penny
in the database) but they did a 510-for-1 reverse merger so they could go
dark (I know you don't know what that means, but it's for my notes).

DSCI, Seems priced about right, but I need to look more carefully

DYNR, a mine, but possibly selling cheap. 2004 earnings of 9 cents diluted, stock is at 25 cents.

DRUG, This one is complicated and it's difficult to tell much about it. It could
end up as an investment, but it might not be cheap enough. A quick check
puts it as being worth $1.20 and it's selling for 82 cents.

EBHC: hey, it's Eddie Bauer!

EPLN, Solid business, but the price isn't cheap. I'll be picking it apart later.

ERIF, Another fairly good company which is not selling cheap. I'll look at this in
more detail later.

ERIF, has good disclosure and provides good visibility into their operations over the years. They clearly don't have a Warren Buffett at the helm or else they'd be making a lot more money. Their investment results are not very good (not terrible).

EZEN, don't remember but I think it's worth following

EVDR, just finished an audit in mid-July and should be releasing the results
some time soon, once the SEC approves it. I checked the SEC website and
their submissed was made Sept 14, 2005, but it was in paper form so I can't
read it. They had "planned" to be registered in Q1 of 2005 but apparently
that didn't work out.

Need to sift through these:
DAAT
DAOU
DDSI
DEWY
DFNS
DGIX
DBRM
DCIU
DNDT
DNII, a mess, but maybe still ok. no clear trading prices.
DRMS
DSCI
DRUG

EBLC
EBOI
EDAC
EEGI
EESV
EGAM
ELDO
ELST
EMRI
EMXC
ENYC
ENTX
EPHM
EPLN
ERIF
ERMS, not very stable, but cheap.
ETEC, suspicious lack of operational cash flow, but might be ok.
EZEN
EVDR, scooter company. expecting release of audited results soon.

FATS, revenues up, earnings down, stock overpriced.
FCPG
FIFS

GACF
GBCS, casino
GBEL, real estate business, priced about right
GARM, struggling recycle business that could be a wildcard.
GECO, minor league hockey, overpriced

Check back on Carnegie Cooke and Company (CGKY), they should have financial results by mid-sept latest. UPDATE: Nothing by Oct 7.

CTIG, no details

Eat at Joes (JOES) (Philidelphia single restaurant). Selling for $1million market cap. Crossed over cash flow break even. Doing better. Still a big long shot.

RZPK is a pachinko strategy company (that's pretty funny). Worth looking at if they start auditing their results.

MHCO
MKRS
MLLS
MLOG
MLTO, With all that manure, maybe there's a pony in there somewhere
MNRD
MOBK (no financial details yet)
MPAA
MPAD
MRCR
MRFD (improving?)
MRPT
MHJ
MTEK
MTWD

NAVH

SMID, Smith Midland Corp is fully priced, but maybe not depending on growth.

SPOP is interesting. Natural food stuff. At break even. Selling for .6 times sales.

SPSC: What's up with these guys? Can't tell easily.

SCIE: medical mousetrap, laser cancer detection, just started revenues

SCSG: yet another bank.

SOTK is growing and profitable but overpriced?

SPND: oil and gas producer is priced about right.

other Chinese reverse mergers:
AVEE,
CAAS
PGJ
CHDW
TBV might be cheap.
KMGB might be priced about right.
SZI is a money loser
TLF is probably priced about right
DXPE is probably priced about right (they're on NASDAQ)

On Oct 21, 2005, CXTI (yahoo, website) signed this roughly 184 page agreement (don't bother looking for the actual numbers in that document because they're left blank) with a number of investment groups. This 8-K filing explains the terms of the agreement (if it takes 184 pages to say it precisely, you have to wonder how it can be condensed into a few pages without losing something).

$6 million of 7% convertable debentues (1 year maturity!) which are sort of like call options with a strike price of 75% of the recent stock price, but limited to no more than $1.80 (which for 1 year, the limit is probably not worth all that much). But in addition to these convertables, you also get 3.9 million handsome Short Term Warrants with a strike price of $1.53 and 18 months before expiration. But wait! You also get 1.96 million Long Term Warrants with a strike price of $3.06 and 5 years before expiration. These can all be yours if the Price Is Right (and you're one of the acredited participating investors).

So what is the value of what these investors are getting? The market says, "Way More Than Six Million Dollars!" because it drove the price of CXTI down by 20% after the announcement (or the market might be saying this is a sign of trouble).

Here's my extremely rough and possibly error-prone estimate of the value of what CXTI gave up in exchange for six million dollars. Well, I consider it extremely likely that CXTI will be able to repay the principal after 1 year (their current ratio is greater than 3). So I'd say the bonds might be [originally I said "probably" but I think that's definitely an overstatement] worth a premium, but we'll ignore that for now because the conversion itself is worth more. You might convert these shares at 75% of the recent stock price, but you'd push the price down quite a bit in selling them off. Let's say the conversion is worth 15% of the $6 million, or $900K, but let's round that up to a million. Using my great skill at valuing warrants (hah), I'll say the Short Term Warrants are worth $500K and the Long Term Warrants are also worth $500K. That's really close to my best guess and I've spent many hours trying to value LEAPs of various companies and comparing that to market prices. But the downside is that I spent almost no time trying to figure out the value of these CXTI securities.

So by my far-from-expert valuation and the back of a napkin-shaped envelope, I figure the company paid out $8 million in stuff for $6 million in cash. Is this a good deal? It depends on the opportunities for that cash. If I had a magic genie who could send me back in time by 3 hours and it was just after a big jackpot lottery event turned up no winners, if I didn't have any money at that time, I'd gladly write a check for $10,000 in exchange for a single dollar in cash. It's all about the cost of the money and the value of the opportunity. It could be that CXTI landed some big deal, but they needed X amount of cash on their balance sheet (the one year maturity sort of indicates something like this). But who knows? Maybe there was some huge shortfall in cash and the "opportunity" is simply not going bankrupt (like I said, far from being likely).

Without any more information, I have no idea whether this is a good deal or a bad deal. But given the cost of the six million dollars, they're going to need a very good opportunity to make it worth while.

UPDATE 20 minutes later: I just realized that the value of the convertables shouldn't be discounted because if you were to buy the same number of shares, you'd end up with an even higher cost basis than the recent stock price. I priced them assuming you'd want to dump them immediately. So I should probably add $600K to the number. Later on in the day I made more changes [with notes].

UPDATE Halloween: Well, I bought more shares (I had a very small investment in CXTI already). It's clearly worth 85 cents, in my opinion

An interesting blog thread on SOX and federalization of state law.

One of the major debates in corporate law has been over to what extent laws should be determined by the federal government rather than by the states. Since “state corporate laws” is nearly synonymous with “Delaware’s corporate law,” a major portion of the debate was over whether Delaware was “racing to the top” in order to provide regulation superior to that of other states, or “racing to the bottom” in order to accomodate managerial interests at the expense of shareholders.

Panelist bloggers

Intro. Opening statements 1, 2, 3, 4, 5, 6, 7

The SEC is shareholder biased, albeit in its view in a positive way. The shareholder of today is not Ma and Pa Kettle holding 100 shares of AT&T for retirement earnings. Increasingly institutional shareholders dominate the market. Do they need an advocate in DC wedded to prescriptive regulation or can their complaints, if any, be as readily and more equitably addressed by private ordering in State civil law litigation on a case by case contextual environment? Moving corporate governance to DC means increased costs with little effort to determine benefit, an arena for dispute resolution decision making that is not unbiased and portends no guarantee that the guidelines, regs or pronouncements from the banks of the Potomac will enhance long term shareholder value. Those who advocate a drift from the common law resolution of disputes by a highly trained and experienced cadre of jurists to the bureaucracy in DC should be careful what they wish for.

Chief Justice Steele kicks ass. I haven't read all of the posts, but it seems like Steele is the only one who really gets it.

It's one thing to ponder legal issues in abstract, but as an investor, what I care about most is having some auditor's neck on the line, having officers of the company personally liable for their actions, and directors with fiduciary responsibility that can be enforced. I want people with significant reputations and money and personal liberty directly at risk. If they make mistakes, that's fine, we all suffer. If they purposefully defraud investors, I want the long arm of the law to grab them by the scruff of the neck and drag them into a fair and just legal system.

If you're going to try to make the investment world better, then setting up the right incentives is what's important. Rather than independent directors, it's more important to have directors with serious money at risk in the company.

But if you're trying to correct a situation where lots of people broke the law and you want to avoid it in the future, don't change the law, just start enforcing it better.

These are companies which were discarded during phase 2 of sifting. I put them here for the record.

HOVVB, residential real estate home builder (in California, Florida, and Texas!) If I wanted that, I'd buy Lennar or even their spinoff LNR... oh wait, I did buy LNR, which was then acquired by someone or other and I made lots of money on it (same with Crossman Communities).

HSPR, in the pre-fab residential construction business (oh boy, wrong time for that kind of thing). And they're new. So they jumped into the housing construction business during a manic period. Those are the kind of people who go bankrupt.

Their balance sheet isn't all that strong (current ratio close to 1). They have an equity deficit.

They just started making a profit (earning 1 cent in Q2). Gross margins are ok. It's selling for 17 cents, which I guess is about the same P/E as homebuilders.

HRBGF, Harbor Global, Russian real estate management, earnings all over the map, cash distribution dividends also all over the map. Seems Ponzi-like. Selling for $8.80.

HTDS, gone.

HTLJ, steel fab, property management (resid and commercial), idle agribusiness, manufacturing. 10-K wording contains great quantities of manure language. Losing money.

HTVL, Cayman Island reinsurance business.

HVYB, bank

HMWS, home warranty (i.e. maintanence) in Arizona. No financials.

NMXS cik# 1101865, New Mexico Software, web and database
unqualified audit opinion (2 auditors), horrible balance sheet, losing money on decreasing revenues.

NNBP cik# 925894, pharm, losing money, restatement, horrible balance sheet

NNLX
website - click on investor relationsions) click on SEC filings -
cik #1030065, went dark in 2003.

Once successfully accomplished, this has the potentiality for solving the world energy crisis

As Instapundit would say, "Heh".

NPDI cik# 1138659, sustainable seafood (aka fish farming)
going concern qualification, stable balance sheet perhaps, negative gross margins. SG&A greater than revenues.

NMSCA institutional food and food service
steadily declining revenues, lawsuit against customer, earned 27 cents in 2005 but it was due to non-operational stuff, would have lost money without it. Low margins for food. Balance sheet acceptable. Huge payroll and other costs.

NPFV - (perfromance improvement to industries) may be good
check annual and latest quarter
a mine with terrible balance sheet in pre-exploration.

HDRX, water filtration business, new reverse merger. Lots of weirdness with this one.

HGIIA, 12 franchised liquor licensed "half-a-car-sticking-out-of-a-wall" restaurants (up from 9 last year). 1950s 1960s themed. Only 1 full time employee (an admin). Very straight forward 10-K. Auditors quit.

Balance sheet is strong, but not much equity.
Thin margins. Results are worse than they look. They earned 1 cent in 2004, but a lot of that was from one-time stuff. More like half a cent. Some dilution. Cash flow was good in 2004, not good in 2005. 2005 is pretty much still looking like half a cent.
Figure the business is worth maybe 7 cents. Stock price hovers around 7 cents.

HICKA, electronics corporation from 1915, now they make electronic diagnostic equipment for car mechanics. Minor qualification to audit opinion.

Strong balance sheet, nearly all equity.
Widely varying revenues, $15.7 million in 2004. Gross margins about 50%. Very high marketing and admin expenses (about 25%). 4.2% net margins in 2004. Earnings are all over the map in the last 3 years. 54 cents, -60 cent loss, 20 cents.
Cash flow is a bit better. Free cash flow is about $1.4 million, $0.1 million, $1.7 million. Consistent 1.2 million shares.

2005 results are way lower. Revenues for first 9 months down to $6.9 million from $12 million with net loss and negative cash flow from ops. The cause was simply lumpiness in revenues, apparently.

Company made a tender offer for small shareholders in order to go dark.

Shares sell for $4.50. I have no idea what the business is worth.

HISC, homeland security integrated something or other.
Assets are spread out. Balance sheet is ok. $1.2 million equity. $2.1 million assets.
They just reached profitability in Q2 on $237K sales earning six thousand dollars. There are over 700 million shares. Revenues haven't been growing all that fast.
This could very well be the most worthless genuinely profitable company I've ever seen on a per-share basis.

HCFB - this company passes and isn't really a bank, it's only a holding
company for a bank. Ok, let's look at HORRY COUNTY STATE BANK.
Earnings were level at around 75 cents, then went up to 92 cents in 2003 and $1.20 in 2004. They earned 62 cents [diluted! a bank with stock options?] in the first half of 2005. Now let's see how much higher than $18 the stock is selling for... $29.50.

NIMU, cik number, the business itself is still in development stage, pretty much.

NEXH, real estate (mostly commercial) in Utah and Kansas. They do a lot of leasing. There might be a foreclosure risk.

36K sq ft old building in Salt Lake City. Only the 7,816sqft ground floor was renting out [as retail] which rents out at $15/sq ft [per year]. Renovations being done on 2nd floor which will lease out at $12/sq ft, 4,700 sq ft. Total monthly receipts are $5,682. Loan payments are $8,875, interest.

One storey retail building in Salt Lake City, cost $535K. 7Ksq-ft, late 1960s building. Much is not occupied.
Another building in a suburb of SLC, $750K cost. 100% occupied. $11K monthly rents (twice the monthly loan payments). $11.45/sq-ft.
Another shopping plaza in SLC. 72K sq ft. 60% leased. One tenant. Sounds crappy. $20K/month rent payments. Loan is $12K/month.
Also a ski condo... unit. Just one condo unit. For sale. Potential fraud.
40 acres ugly industrial land in West Virginia. Unused, bad future outlook. Cost is impaired now. WV EPA looking for cleanup. Ugh. Property dumped for $1,816 in unpaid property taxes due to clerical oversight. Oh geez.
Also some undeveloped land in Kansas.

Assets mostly PP&E and land. Very weak balance sheet.
Losing money.
Big gain from disposal of assets in 2005, but still losing money all over the place.

NLEQ, industrial equipment leasing consolidators. Bankrupt, but emerged on Feb 2004. All stock was wiped out. They merged with NES Rentals which survived the merger. Audit opinion qualified by a change to how the company accounts for goodwill.

Assets are mostly rental equipment and some AR. Liabilities are nearly all debt. 15% equity to assets. About 20% gross margins. Losing money in 2004. Operational cash flow is positive due to depreciation but free cash flow negative with normal capex.

NMKT, voice over IP telecom business. Ugh. There also in other areas of telecom. It looks like there might be some interesting stuff. Let's do the numbers:

Balance sheet isn't too bad, but lots of goodwill and intangibles. They have an unconsolidated subsidiary to watch out for.

Revenues went from $2.3 million in 2003 to $14.6 million in 2004, presumably due to acquisitions (assets jumped from $9.5 million to $25 million). Gross margins are about 40%. Operating margins are thin, so the big question is capacity and market growth. They earned about half a million in 2004, 1 cent diluted. Share count went from 51 million to 82 million during 2004 (mostly stock for debt). Cash flow is kind of ugly, but probably too much stuff in flux to really know what's going on.

In Q2 05, assets had jumped again up to $44 million. Bulemia is a terrible thing. The incremental sales were much lower margin. There are all sorts of one-time things going on in 2005: bad debt expense recovery, lawsuit settlement, gain on forgiveness of debt.

I can't tell what this business is worth. There could be a pony hidden in all that manure. Or maybe not. Maybe it's worth 10 cents? Now let's look at the stock price: 38 cents.

This is one of those companies with a high degree of difficulty.

MLOG, These people have gone REALLY dark. No news, no updates, nothing.

MLTO, All their financial numbers are estimates. Their balance sheet is fairly
frightening, although they could survive without dilution if everything were
to fall into place well. They might be worth 4 dollars a share, maybe more.
But the stock is selling for 4 dollars a share. I'll put this on the list to
look at... on second thought, no. If they get audited results that will help. But I just passed on FPGR which also has unaudited results and some weirdness that made me not invest... and they are way cheap.

MOBK, they don't provide any information about their financials, so I can't invest
in them.

MODM, losing money, they're late filing quarterlies.

MCAM, In the most recent quarter, they actually started making money again, but the balance sheet is already so weak that the value of equity is doubtful. I don't see how the future of the business can be predictable.

MCET, would also pass the criteria since they didn't have declining revenues
and the cash flow statement for the most recent year is positive, especially
since they started making money in the 2005-07-15 quarter report. UPDATE: what was I looking at? They're losing money like crazy.

MRCR, might be worth $6 and they're selling for 87 cents, but cash flow is bad
(need to find out why). UPDATE: losing too much money.

MRGN, movies on demand, horrible industry, no good.

MRFD, Yum! Brands franchisee. They haven't made money since 2002, and that was only a small amount for 1 year. However, they seem to be improving during 2005. The stock has gone up quite a bit because of it. But if they were going to be consistently making about a dollar a year per share, then it would be worth $15: 3 times as much as the current price. Worth looking to see why they're improving and whether it's sustainable (probably not, I discarded it).

MSITF, They have no recent financial statements, but they're making lots of hype-ridden claims. They're based out of the Caribbean and they're in an industry that itself is somewhat of a red flag. They have very little of what I would consider normal disclosure, but lots of hype. And about 90% of their balance sheet assets are hidden in an investment in another company. This one definitely doesn't pass the smell test, as they say.

UPDATE Sept 7, 2006: I posted this stuff to the MSITF message board (Raging Bulls)

I wrote that stuff about MSITF (I run that blog). As you can see from that page, I've looked at a huge number of companies. Many of the companies I pass up will end up going up in price (for example, I knew about PTSC when it was 20 cents but passed it up because I didn't have confidence about the total size of their eventual patent infringement awards), and some of those will be companies that I could have understood if I worked hard enough at it. What I do is attempt to identify a very small number of investments that I have strong reason to believe are worth a lot more than their current price. I intentionally filter out a lot of good investments because it's a lot more important to me not to make a bad investment than to pass up a good investment.

I've learned from experience to rely heavily on red flags. I basically go through a company and collect the things that are fishy or are commonly associated with bad things. When I looked at MSITF, it was rife with them and doing a quick check now doesn't look any different.

If you look at the top of that page you linked, you'll see a lot of work I did on HQSM, but at the end of it, I still chose not to invest in it. And believe me, HQSM looked a great deal better than MSITF!

I figure you can do investing or you can do gambling. The fact that MSITF *might* be ok is not enough for me to put even a dollar into it.

FCPG, face recognition database stuff. Losing money badly but the future could be
very good. Unlikely to ever be a good investment because it's a glamorous
technology among investors.

FIND, a bible studies software maker that sells directly to customers.
They lose money in normal operations but they've sometimes been able to be
profitable by various other items. I don't see this as being a good business
to own.

FTPI, startup.

FRMO, an interesting company which does investment analysis and has some stocks.
I'm not sure I'd ever be able to know what the company is worth.

FSCR, Federal Screw Works... I didn't know the IRS was a public company.
They're barely eeking out a living, but paying way too much in a regular
dividend. Not very interesting other than the funny name.

FULO, these people are in a terrible business, eeking out a living.

MDVN, "medical mousetrap" losing money

MDTA, software, bad

DVID, These guys are headed off a cliff.

DYTM, not too interesting

DOWJB, Wow, I didn't know Dow Jones was on the pink sheets. They seem to be priced about right.

DSSI, It would be nice if they could have made money in *this* millenium.

DXXFF, composite patio decks. No financials.

DTIX, money loser

DTTO, money loser

FBGO, looking at the SEC docs, it's not a good business

FATS, revenues have gone up while earnings have gone down, but cash flow has been
going up. The stock is probably overpriced.

GBCS, Casino, might be a bit cheap, but casinos can be bad business. Prior fraud.

GBIR, Transports goods from Western Europe to Eastern Europe. Bad business.

GAXC, Overpriced ATM machine operator.

GECO, minor league hockey, overpriced

DMEC, This one's no good. They simply have too many shares (639 million) for them
to ever be worth anything. The stock is cheap at 1 cent, but not cheap
enough given their unstable situation.

DRMS, Doesn't seem very interesting

DNAG, They have essentially 841 million shares. In 6 months they did half a
million dollars in business, which cost them nearly that much to produce,
plus they had nearly another $2 million in expenses. Even at 2 cents a
share, I can't see it as an investment.

EBLC, Terra Block scares me because they seem more driven by the technology
than by solving their customers' problems/needs. Why would customers use
their product rather than bricks? The burden of proof is clearly on EBLC to
gain new customers. They would need to be far better than bricks to overcome
doubts about unforseen issues.

SEHI, manufactured homes. Crappy results over time. Overpriced.

HCAR, new and used car dealerships in the Northeast (some nearby). The income story is that SG&A has steadily been driving downwards. Interest income dropped after 2001. The combination of these two made them profitable (lost money in 2000 and 2001). They ramped up the business in 1998 and took a loss that year. But otherwise they've been profitable. Some stock options. Cash flow is kind of crappy. Recent results have been very good. That's going to change with SUVs probably decreasing, interest rates going up. Depending on the stock price, this might be a short candidate. They earned 50 cents in 2004, but long term I'd price it as if they earned about 15 cents. They beat 2004 numbers in Q1 05 (on lower revenues). The stock is trading at $1.40, so the market isn't fooled by this one.
low priority pile

HEMA, It's the only for-profit blood donation company. There's a nursing shortage which makes expansion very difficult. In Southern Calif, a major company switched to 24-hour frozen plasma from 8-hour. If enough companies switch, HEMA might have to reduce prices. A new therapeutic apheresis company stole some of HEMA's employees, causing a recruiting hit and a salary hit to keep nurses from leaving.

HEMA has been restructuring, closing some centers.

Only one large 10% customer. No legal matters.

Revenues are fairly constant at around $26 million for 4 years. Gross margins declined for years, but then went back up to 21% in 2004 (restructuring). Gross margins in continuing operations increased from 7% to 17% and 22% in Q2 05. They earned 17 cents diluted in 2004. Equity took a big hit in 2003, probably due to restructuring. Unqualified audit opinion. Q2 earnings were 5 cents diluted (vs 6), 8 cents diluted for the half vs 9.

I'd expect some deterioration in earnings due to the issues above. Also some stock option dilution.

Cash flow is great. Earnings is probably fairly close to free cash flow. But cash flow in 2005 has been lower due to various balance sheet movements that would indicate a slowing business.

Balance sheet is AR, PP&E, and cash. Current ratio is about 2. Lots of equity. This only improved in Q2.Ok, so based on all of this, a rough guess of value would be $1.95. Recent stock price is $1.56.
worth following

HFIT, fitness and health management services to corporations and hospitals and universities. They bought Johnson & Johnson Health Care Systems, Inc. at the end of 2003.

Unqualified audit, with an extra paragraph about extra auditing done.Assets are mostly goodwill and AR (AR is mostly unchanged by Q2 05). The next highest is an order of magnitude lower. Yuk. And that's an intangible. Double yuk. Otherwise the balance sheet looks stable. Half equity.

25% gross margins. 6.7% operating margins. Earned 10 cents diluted (7 cents in first half 2005), but watch out for deferred tax assets. Some dilution.

Cash flow looks ok through Q2 05. Free cash flow probably matches earnings, but it's not easy to tell quickly. There's lots of stuff like amortized intangibles, deferred taxes, etc.

Quick valuation guess: $1.80. Stock price is $2.10.
worth following

HNNA, investment advisor/broker. They ran a "Dogs of the Dow" fund. Didn't Motley Fool come up with that idea? HNNA has been buying up mutual fund management companies. Revenues went way up in 2004. 50% operating margins (up from 37%). Wow. 29% net margins (up from 22%). Double wow.

Unqualified audit opinion. Balance sheet is odd, as expected for this kind of company, but it's good. $1.63 diluted earnings (vs 65 cents in 2003). Cash flow is good, as you'd expect.

Results leveled off in 2005. 93 cents earning in 9 months (vs 78 cents). Doesn't seem like a lot of dilution on quick glance.probably worth about $18 per share. Selling for $26
worth following

MKRS, It's difficult to know what the business is worth. It might be worth 10cents, maybe more. It's selling for 22 cents. But still it's...
worth watching (update: stop following)

MPAA, worth about $10 and they're selling for $10.20.
low priority pile

MPAD, they earned 55 cents, but the actualcash flow has been terrible for 4 years (was better before that). Based onearnings, they'd be worth about $7, perhaps more. They're selling for $8.00.
low priority pile

MRPT, they made money in 2004. But more importantly their website contains valuable info about other companies that I've looked at, such as Bulldog Technologies and Billy Martin's!

MEK, Moved to AMEX. Results improving dramatically in Q2, earned 7 cents. Priced for Q2. Some Katrina damage. New revolver at prime + 1.5, secured by "security agreements". Seems fully valued, but...
worth putting on the good list (update: stop following)

MTWD, overpriced based on current results, but unknown future growth is a wild card.
Worth tracking

MHCO, (plumbing & electrical supplies) seems like an OK company but priced about right. Someone "found" it in September.
worth following

MIOK, they're making a cheap GPS system, which is good, but I fear that the big
companies will duplicate what they're doing and do it even cheaper with large
volume.
worth following

Hanover Foods is an old business, going back to 1924. It's in Harrisburg, Pennsylvania. Real rust belt stuff. Their property, plant, and equipment (PP&E) is about $200 million and has been depreciated down to $78 million. Old stuff.

This business has a lot of minor/regional food brands (mostly Penn Dutch) like Hanover Farms, Myers, Dutch Farms, O&C onions (in the jar, not the common ones in the can), Bickel's, Bon Ton, York Snacks, Wege Pretzels, Spring Glen, some others, and my favorite: Aunt Kitty's. Makes you think of kitty litter, no?

Revenues seem to increase at about the inflation rate. I've looked back as far as 1996. Share count has been very steady. They pay a $1.10 dividend per year. But don't let this fool you. The stock is selling at over $100/share.

Surrounding this old business is a raging family battle going back to 1996.
But then on Dec 6, 2004, the company made a tender offer for all of its odd lots of A shares (15 shares or less). The purpose was to decrease the number of shareholders of record to less than 300 so they could go dark on Jan 10, 2005. They went really dark: no press releases, no news, nothing. It's too bad because they're selling at a P/E of probably around 7.

I talked to a family member yesterday who asked why every stock mentioned is a "don't buy". And the funny thing is that for every stock mentioned here there are probably 30 or more that didn't even make it onto the blog. So far that's been perhaps 2,000 (UPDATE: probably closer to 3,000). My goal is to find the best 5 or 6 investments I can find. Once I find them, I'm done until some of them start reaching full value, and then I start the process over again. Mostly this will mean revisiting stocks I looked at previously. A lot of investment knowledge is cumulative.

Warren Buffett recently mentioned that he personally went through thousands of pages of stocks in 1951.

Back in 1951 Moody's published thick handbooks by industry of every stock in circulation. I went through all of them, thousands of pages, motivated by the hope that a great idea was just on the next page. I found companies like National American Insurance and Western Insurance Securities Company that nobody was paying attention to that were trading for far less than their intrinsic values. Last year we found a steel company on the Korean Stock Exchange that had no analyst coverage, no research, but was the most profitable steel company in the world.

I'm trying to do the same thing with the Pink Sheets and OTC BB. No matter how much experience I have with large amounts of information, it's still fairly overwhelming. But focus and determination are very effective.

According to Business Opportunities Weblog, this blog, pink-sheets.blogspot.com, is worth $2,822.70. I think that's an overvaluation. I mean, just look at the distinct lack of a mission statement, the small number of employees, the lack of an independent board of directors, the lack of SOX compliance, the fact that I was banned from the actual pink sheets website for over a month, and my results are unaudited.

Genex Pharmaceutical, Inc. website pink sheets yahoo SEC Annual report for year ending Dec 31, 2004 Q1 report for March 31, 2005 Q2 report for June 30, 2005

10-KSB
Delaware (inc 2002)
offices in Tianjin City, PRC
As of April 29, 2005, the registrant had 3,212,232 common shares outstanding
Reverse merger with Tianjin Zhongjin Biology Development Co., Ltd. Previously KS E-Media, Inc.
Producing and distributing Reconstituted Bone Xenograft ("RBX")
published paper on dog RBX
published paper on mouse RBX using cow bone 2002, mostly same authors
published paper on rat RBX 2003, US and Korean authors

Here's a good, detailed description of the process. It works in animal tests. Antibiotics can't be delivered directly to infected bone without toxic effects. There is a way around this using beads which apparently bleed antibiotics but these must be surgically removed. If you can create bone paste with antibiotics, that would work great, but has some problems. Freezing, freeze-drying, decalcifying, boiling, radiating, and de-proteinizing all fail to work because they either don't elminate the stuff the body reacts against or else they destroy the antibiotics needed. The solution is to chemically treat the bone paste so the body won't reject it. Then add "BMP [bone morphogenic proteins which stimulate bone growth], a highly osteoconductive material, from calf cortical bone". In addition to being a good solution for bone grafting, it also works well compared to existing solutions for repairing bone defects.

An unrelated informational article about bone grafts. It talks about autografts (bone from the same animal) and xenografts (bone from a different species of animal). It also goes into some detail about BMP, freezing, immune reactions, etc.

There has also been some progress in the use of cuttlefish backbone for xenografts.

GENX believes RBX requires fewer medical procedures and has less immune problems than autograft or allograft methods. Based on what I've read, I'd say that's correct. However, autograft is pretty compelling (but requires two surgeries).
Bovine bone --> decalcify --> remove protein --> add BMP = RBX

Tests at Beijing General Military Hospital showed an 88.4% success rate. It's only more cost effective in "certain cases". This is sounding less and less compelling.

RBX is being distributed to 400 hospitals in 22 provinces. 50 direct sales employees. 20 independent 3rd party resellers in 13 other provinces. Sales is via professional medical seminars, technical conferences, internal hospital meetings, clinical studies, professional journals (such as this).

No trademarks or patents. Relies on trade secrets as disclosure is deemed worse. Key employees have signed NDAs. No non-executive knows the whole process, with records and files maintained separately.

Two resellers account for 15% and 10% of 2004 revenues. Both signed 3-year nonbinding letters of intent for RBX deliveries for $1.4 million in sales.

Resellers: 56%
Direct sales: 44%

R&D is outsourced.

Business License issued by The Tianjin Administration for Industry and Commerce
Manufacturing License for Medical Devices issued by The Tianjin Drug Administration
Certificate for Medical Devices Product Standard: Q12 XJ 3867-2001, which is a certified product statement of manufacturing and production for medical devices.

86 employees (11 mgmt, 23 production and some R&D, 41 sales, 6 finance acctng, 5 admin). 37 added in 2004 (10 prod, 27 sales, 5 finance). Sales has 7 managers. Sales teams are in Guangdong, Tianjin, Beijing, Shandong, Hunan, Hubei, Sichuan, and Fujian.

The dominant competition for RBX is traditional bone graft surgery products, the market is fragmented with only small businesses in regional markets. There are no other known companies pursuing the national xenograft market. There is a national allograft competitor, Shanxi Osteorad. The 10-K lists other companies in the business.

Related party stuff
GENX advanced cash to parties related through common shareholders during 2003 and 2004. $1 million bears 6% interest. $169K is interest free. Both are unsecured. $197K is a 6 month term loan due May 2005. $244K is a 6 month term loan due April 2005, but was extended for 1 more year. $560K is due on demand. No frickin explanation!
GENX borrowed small amounts of money from a shareholder interest free, due on demand, unsecured.
GENX rented office and factory from related parties. The total was about $50K.
GENX purchased $1 million of PP&E and inventory from related party through major shareholder. The AR and other receivables did not relate to GENX.

No legal proceedings.
No significant new accounting changes (except stock options).

GENX terminated Manning Elliott, Chartered Accountants (handled 38 public companies in 2005) in June 2004. From June to Oct 2004, Kabani & Company were the auditors. From Oct 2005 to March 2005 it was Weinberg & Company, Inc. (handled 42 accounts in 2005) auditors (no adverse opinions). They re-appointed Kabani & Company (handled 28 accounts in 2005) in March 2005. What the hell is it with Chinese reverse merger companies and revolving doors for auditors???
Audit fees for 2004: $70K

Fuzhi Song, 53, Chairman, CEO, President
Song only has 10 years of experience in the pharm business. CEO of Tainjin Zhongjin Pharm Jan 98 to present. Chairman since 1999. Also Chairman and GM of Jinshi Group.
Shuli Zhang, 43, CFO, Treasurer
Joined in 2004. Previously CFO at Tainjin Pharm. During 2002 was audit manager of Tainjin Jiurong Accounting Company. 2000 to 2003 Chief Accountant of Tianjin Hualinhang Investment Co, CFO at XinJiang Zhonghe Ltd. Is a CPG in China (and CPV and CTA).
Sufen Ail, 30, Secretary
MBA from St. Joseph's University in Philidelphia, PA in 2001.
No family relationships.

No audit committee. Same with other Chinese reverse mergers.

Officers, directors, and 10%ers did NOT comply with SEC requirements on filing. Company will tell them to file. None of them have filed as of Oct 23, 2005! The company plans to have a Code of Ethics by the end of 2005 (yeah, right).

None of the executive officers were paid more than $100,000. No stock options, retirement, pensions, etc. except for the usual Chinese legal stuff.

CEO owns 82% of the company. That's bad. I'm thinking that's a showstopper, at least in combination with the other red flags.

Update Nov 26, 2005: Q3 results: earned another 2 cents with good cash flow. Revenues down slightly. Dismissed auditor. Stock price is down somewhat, but not nearly enough to consider it.

Normally, I don't show the second tier of effort on the blog (at least not in the last couple of months). But I decided to drop these here because some of them have more than the usual tier-2 analysis (originally I called this tier-1, but that's actually incorrect). It's possible for good investments to get thrown out and it's also possible for bad investments to get through this phase. My only goal is to generate smaller and smaller lists with higher and higher concentrations of potential investments.

GEEK
an ISP (yuk), but the good news is they're serving a niche business of rural people without other choices. Despite that, it's no accident they have steadily declining revenues. They earned 22 cents in 2003, 11 cents in 2004, 1 cents in the last 9 months. Their assets are almost entire "OTHER ASSETS", which is very odd. Balance sheet is also weak. $4 million in equity. They had layoffs. They bought 5 other ISPs this year for $1 million. A director resigned.
not interested

GDVI
They create modular stuctures (temp classrooms, offices, etc.). Holding co. with 2 subsidiaries. They restated 2004 financials. Capital heavy, but strong balance sheet, half equity at year end. Balance sheet is weakening in Q1 with uncontrolled AR and inv growth. Total assets $9.3 million. Business is ramping up. Low gross margins of about 30%. 138 million shares with slowing growth in share count. Crappy cash flow due to AR and inventory (expected with massive revenue growth). They've been winning Calif K-12 business. But the baby echo boom is ending? Is this business sustainable? They plan to expand into commercial. The real question is the competitiveness of these two companies vs the industry. Need gross margin comparisons, and scope out who's providing modular stuff. MINI may even be a competitor. A lot of the growth has been through acquisitions, so beware. Probably not as good as it looks. It's selling for about 8 cents a share, which may be about right.
keep it around

GFRP
manufacture vitamins, minerals, sports nutrition stuff. 28% gross margins. Sales increased by about 17% in 2004. Assets are about evenly split between AR, inventory, and PP&E. Current ratio is ok. $1.4 million equity. $4 million assets (way up from $2.6m year before). Net margins look kind of thin. 2004 results boosted by a currency exchange gain. Real earnings were about 13 cents (19 cents in 2003). Very little dilution. Cash flow ugly in 2004 (AR and inv), ok in 2003. Capex was consistently higher than depreciation. Maybe it's worth $1.50, which is almost exactly what it's
selling for. Q2 05 results are worse, mostly due to a big Q2 G&A hit which was poorly explained in the 10-Q. About 50% sales to one customer. Bad vibes from this business.
not interested

GMOS
retail sports superstores (only 2) in Chicago and Ohio. Started in 1984 as a Honda dealer, expanded via acquisitions (bad). Bought a business in 2004. Assets are mostly inventory. Liabilities are mostly notes payable. $1.3 million equity. $19 million debt. Is this a frickin bank? Seems way over-leveraged. But loans seem to average about 7%, meaning the motorcycle companies might be stuffing the channels? Gross margins are 12%. SG&A nearly doubled in 2004. There's a $6 million increase in floorplan liability. What's that? Market cap about $11 million undiluted. 8 cent diluted earnings, stock selling for $1. This could be interesting to analyze, but otherwise, not interested. Not crappy/unstable enough to short.

GNCI
Heavy machinery for highway construction, located in US and UK. Business goes back to the 1960. Revenue has fallen every year since 1998. Earnings are all over the place. Assets are inventory as PP&E as you'd expect. Current ratio is close to 1. Equity $15 million. Assets $42 million. Very little dilution. Cash flow totally sucks in 2002, 2003, 2004, and 2005 so far. They own 45% of Carbontronics and 25% of Carbontronics Fuels. These investments cost them nothing, so they don't show up on the balance sheet. Here's the invisible wild card. The IRS put a stop to cash distibutions while it did investigations. Result was fine. Payments resumed. If oil prices remain high (which I consider unlikely, I think there's an oil price bubble), then these investments seem to become worthless.
low priority

GNCMB
Oh geez, the 10-K starts out with a telecom dictionary. That's a bad way to begin. The last thing I want is a techie telecom business. Alaska telecom business. At least they have cable TV business.

Revenues increasing every year since 2000. So has net income (net margins increasing to about 9%). Earnings per share: 34 cents in 2004, 24 cents in 2003, 8 cents in 2002, 5 cents in 2001, 29 cent loss in 2000. And half their revenues are in long distance service. This might not last. Subscribers and potential subscribers haven't changed in 2004 (except for a 42% increase in cable modem subscribers, but the base is very low). Revenues in 2004 were helped by Olympic and national election advertising. capex $35 million 2004 (across the board increases) capex $19 million 2003 assets dominated by PP&E obviously strong balance sheet income taxes growing fast (good sign) very little dilution cash flow is strong. At least capex is funded by operations. $234 million equity, $850 million assets Revenues continue to grow in 2005, but operating income is flat due to SG&A and depreciation and COGS increases. This is a sign that growth lately has been totally unprofitable? They'll probably earn 35 cents this year. The stock is selling for $9.50, so this is clearly not going to be a good investment at this price. But things change.
worth following

GNSM
business management software. Customers include Dow Chemical, Du Pont, Emerson, Exxon, Siemens, Shell, Toyota, US Dept of Defense, NASA, Mitre, Motorola CSC. That's a serious customer list. Sales are 50% in the US with the rest in Europe and some elsewhere. Half direct sales, half channel partners. Revenues have been fairly constant since 2000. Operating and net income have been improving roughly. Balance sheet is mostly AR and then cash, with some PP&E. Current ratio is 1 (but almost all liabilities are current, and not due to default). $1.6 million equity, $9 million assets. Cash flow matches income fairly well (which you'd expect). Heavy dilution. 7.6 million shares (1.8 million options outstanding). I'd expect an average of about 8 cents of cash flow per share per year. That's really rough, tho. The company would be worth $1.20. It's selling for $2.06.
worth following

GOKN
oil and gas company service provider. 3.2 million options (I thank them for putting that up front). revenues up 20%. balance sheet is mostly AR with cash and PP&E.
current ratio is a bit less than 1. negative equity. very low margin business. They earned a lot in 2003 due to a one-time gain on financial restructure. Otherwise, it would have been 10 cents earned vs 16 cents lost this year. Lousy cash flow. They barely squeaked out positive earnings in Q2 05.
not interested

GLMA
fiberglass maker. Losing money on slightly increasing revenues with positive cash flow from ops. Earned 5 cents in the first 9 months of 05, but selling for $1.75.
worth following

GLOI
OLD BUSINESS:
Artwork management services to corporations and healthcare facilities in New England. I didn't know there was a market for such a thing. I thought the highest ranking person in the building had their artsy daughter go around and find artwork for the building.

Revenues and income is going to be lumpy, which is fine. Gross margins are about 40%. Their office is more or less in Springfield, MA (provided by CEO free of charge). The founder/CEO is essentially the business. Her salary in 2003 was $97K but declined to $43K in 2004. She owns, get this, 93.88% of the business. Why bother being public?

The balance sheet is terrifying. Revenue declined from $449K to $209K in 2004. 6 million shares. Small loss vs small profit, all less than 1 cent. Cash flow is kind of humorous.

Damn, I didn't see that they did a reverse merger so this old stuff is worthless.

NEW BUSINESS:
Losing money on declining revenues with negative cash flow from ops.
not interested

GESM
These guys are just looking for money from someone to continue doing whatever they were doing. No financial statements, no accountability, no thanks.
not interested

GSCP
By some miracle, they managed to make money in 2004 after losing huge amounts in the 3 years before that. Enough stock options to make earnings drop to 0 cents per share. Business seems to be picking up and they earned 5 cents in the first half of this year. They're selling for $1.60, so the market has priced that in already. But revenues continue to grow and they landed a military account.
worth looking into (update: stop following)

GSHO
Chinese steel company. Looks fully valued. Plus the steel industry in China is a bit overheated.
worth following (update: stop following)

YaSheng issued a press release today. They selected Malone & Bailey as the new auditor. From the M&B website:

At Malone & Bailey, we’re a medium-sized firm made up of six partners with big national and local firm backgrounds. Our past experience has taught us that big accounting firms can’t and don't serve small clients economically. Their overhead expenses, leverage models and service delivery methodologies make it difficult to serve their small clients profitably.

They rank at #10 for most companies audited: 64

They also work very little overtime, are flexable, and let employees wear business casual [except when it's Hawaiian Shirt Day... just kidding].

My assessment: M&B seems to disclose a lot of stuff about their organization. That's good. Of course the bad thing is that the auditor has only now been selected. Or maybe that's a sign of dilligence. Who knows. So I guess, on the whole, this is a slight positive.

Lam Liang Corp (new website) is based out of Thailand.

We were formed to design, produce and sell fashionable computer laptop cases for women through our subsidiary, Maha San Lam Liang Co. Ltd., a Thai corporation, in Bangkok, Thailand. In November, 2004, we acquired 99.94% ownership in a privately-held company, registered under the laws of Thailand under the name of Maha San Lam Liang Co. Ltd. The company was formed and registered in Thailand on November 5, 2004 by Dr. Anchana Chayawatana and she is the sole officer and director of the company. The Company intends to develop a website for the purpose of generating retail orders from the public at some point in the future, although no work towards this website has been completed as of January 31, 2005.

They have no revenues. They have only $49,098 in assets, but almost all of it is equity. There's a $14 accounts payable debt (down from $15 in the prior quarter) and a loan from officer (since there's only one officer, we know who it is) of $1,847 (was $802 prior quarter).

As of July 31, 2005, the Company owns office equipment and furniture totaling $1,724.

2.1 million total shares (1 million owned by Dr. Chayawatana). The last trade was 10,000 shares at 82 cents, which would be a market cap of $1.72 million... for a company with no revenues, $49,098 in assets, a semi-functional website, and plans to make women's fashionable laptop cases (you can see the rough plans on the website).

Since inception, we have completed the initial design of our first bags; however, we have been unable to locate and engage the services of a manufacturing facility to satisfactorily produce the bags to our specifications. We have had 3 different manufacturers attempt to produce prototypes, but the finished products were not satisfactory. It is our intent to produce "high-end", quality computer bags for women and we are determined to find a local manufacturer who will produce quality bags for a reasonable price.

I sincerely wish them luck. I can't stand laptop cases and any competition is good. I have to give credit to Dr. Chayawatana for getting listed on OTC BB, doing the SEC reporting, getting legal both in Thailand and the US, and keeping the outside debt down to a managable $14.

But geez, there was a time when becoming a public company was a sign of success and corporate maturity. Nowadays, it means nothing.
update: stop following

BKBO issues yet another open letter to everyone.

Fuzzy undisclosed metrics show positive trends!

Customer base of 12,000 customers expands by 2,300, including NTT, Bank of Taiwan, Oil and Gas Corp of India, Korean Navy (presumably South Korea), etc.

60% of new bookings are from new customers, down from 75% reported Jan 05. (lower is better)

Most US transactions are Veritas (market leader... for now) replacements.

Maintenance attach rate is 100% in North Am, retention 90%, admittedly worse elsewhere with no details.

Slight increase in Linux.

NetVault 7.4 will cure all the world's problems. Not really. But it seems to be in beta testing.

R&D increased, with new cheap offshore work being done.

They're taking a big hit from SOX requirements.

[Semi-Sarcastic] Minor Bad News: they hired a Sr VP of Corporate Development and Strategy in Sept. The guy worked in all the same places as all the other guys (Sterling, Seagate, etc.)

Bookings (total dollar contracts signed during the time period) for the 6 months ended Sept 30 increased by 27% over prior year. Revenue is spread out differently from bookings.

Mac OS X is an opportunity with NetVault 7.3.1 with native Mac GUI released Sept 20. First enterprise-class (isn't that a Star Trek thing?) backup and recovery solution modeled after Apple's Server Manager UI. "This was, by far, one of the most successful announcement in BakBone's history." Should be on the shelves shortly. Early wins at University of Utah, Hollings University, Rush Henrietta Schools (education market is big).

OEM stuff is vaguely good. Teradata will offer a Linux version in fiscal Q3. Network Appliance is in Yahoo, Shell Oil (nothing new).

Not all news is good news. BKBO announced last week some new strategy, Integrated Data Protection (IDP) which sounds like distracting BS.

So, where do we stand today with the publishing of the Company's financial reports? The good news is that we are confident there is an end in sight. We are working through the iterative audit process with our former auditors. We have made available all supporting documentation for revenue transactions from fiscal years 2003 and 2004 in order that they can complete their audits for these periods. Let me again state that revenues previously recognized in prior years will all be recognized, but we must ensure the appropriate accounting treatment of revenues to assure that they are recognized in the proper period.

We are making progress, but it is slower than anticipated. We are working diligently to get the Company through this stage of its financial audits. When a public company changes its revenue recognition policy, it is an exhaustive process which requires the detailed review of transactions which have transpired over many years.

At such time as our financial reports are finalized, we will be in a position to file the delayed financials with the U.S. Securities and Exchange Commission and the Canadian Securities Commissioners. Simultaneously, we will file the appropriate applications to resume trading on the Toronto Stock Exchange, as well as the Over-the-Counter Bulletin Board.

As much as we would like to predict the date when this work will be completed, there are important parts of the process we do not control. When it becomes possible for us to determine a completion date for the audit work and filing of our financial statements, we will immediately make the appropriate disclosures. [i.e. no idea when it will be done]

Yes! And the stock price drops. And I'll probably get a chance to make money off BKBO again.

UPDATE: They issued two different open letters, the second one has MCoaHN (Minor Changes of a Humorous Nature):

for example
SOURCE BAKBONE SOFTWARE
SOURCE: BAKBONE SOFTWARE

BakBone: Perpetual Screwups

UPDATE: Never mind, the bid is up to $1.55. I missed the selloff on Monday.

First, everything I write here is Copyright 2005 (or later as the posts will indicate when they were written) by myself, but not all my rights are reserved. You're free to link to any posts if you want. You're free to take whatever actions you want with the securities mentioned, but keep in mind this disclosure and this second disclosure. Just remember I could be totally lying about whatever I say here... but that would be difficult, considering that I've structured it all so that my statements are easily verified by publicly available documents linked nearby. You're free to advocate any company I mention here without referencing this blog or myself. Claim the idea for yourself; I really don't care. I'll never bug you about it and neither should anyone else (unless you copy large amounts of stuff from here word-for-word from several posts and pretend like you wrote it, which would be silly). It's all public information. I can't claim any investment ideas as being mine. Why would I want to? My goal here is to find cheap stocks and wait for them to become fully valued, not to become a respected investor or blog author (those blog ads don't pay very well). I have no desire to be remembered as "that guy who discovered XYZ stock". If other people grab the ideas and run with them, isn't that exactly what I want?

I believe the best information is anything which meets all of these criteria:

1. By itself, it's a small amount of information
2. It's essentially unrecognized before it's disclosed
3. It's easily verified
4. It's surprising and unexpected
5. It's based entirely on easily obtainable public information that has been around for a while

An example of this kind of information is the coincidental combination of Pink Floyd's "Dark Side of the Moon"and the movie The Wizard of Oz. Someone added this little piece of information to the world's knowledge database, although no one seems to know who ("some people down in Los Angeles").

My intention with this blog is to find investment information that fits these criteria, mostly by brute force searching. If I find good investments down in the dark recesses of the securities world, that's great. Over time, more and more people would find them as well (with or without my help). The stocks go up in price as they become more mainstream. By the time they're in the S&P 500, they have a high P/E ratio and they end up in everyone's 401K portfolio where investments increase at about the same rate as the overall economy. The people who make money are the people in the chain between finding the stock and putting it on the S&P 500.

Advant-E Corp (sec, website) is "changing the way business does business." Despite that incredibly crappy motto, I've decided to look into this company.

10-K
First, let's skip directly to the numbers:
Half their assets are cash and their entire liabilities are about half of that. This balance sheet is the Rock of Gibralter, despite having a retained earnings deficit.

2004 revenues are $3.6 million (vs $2.9 for 2003)
Gross margin is $2.36 million (65.6% vs 61% in 2003)
Net income is $469K or 7 cents/diluted-share (vs $215K or 4 cents in 2003)
The dilution is mostly from conversion of convertable notes.

Free cash flow is about $900K (vs about $300K in 2003)
Financing is all paying off debt and paying costs of securities registration.

No legal proceedings.
37 employees (21 technical, 11 sales+marketing, 5 admin/finance)

GroceryEC.com allows its subscribers to send and receive electronic purchase orders, invoices, price changes, item information, promotional contracts, advance ship notices, and other documents via a web-based service. The grocery retailing industry has changed dramatically due to technological advances with EDI making many of these changes feasible. The strength of the Company’s business model is that the party that has a large influence on the buying decision, the major grocery retailers (“hubs”), is not the party that pays for the service; the suppliers (“spokes”) who use GroceryEC.com pay for it. The large retailers increase the return on their existing EDI investment, and smaller and medium-sized suppliers gain efficiencies at a very reasonable cost. At March 1, 2005, web-EDI supported more than 120 retailers and had approximately 3,000 production customers (primarily GroceryEC) generating transaction revenues.

Q2
Q2 revenues are $1 million (vs $851K)
Gross margin is $702K (65% vs 63%)
Net income is $120K or 2 cents diluted (vs $107K or 2 cents diluted)
SG&A and taxes ate up the gains

6 month free cash flow is about $407K (vs about $416, the differences are many)

At June 30, 2005 the Company has 970,000 outstanding warrants for the purchase of the Company’s common stock, as follows: 700,000 shares at $1.205 per share; 250,000 shares at $1.25 per share; and 20,000 shares at $1.48 per share. The warrants expire as follows: 875,000 warrants between September 27, 2005 and December 13, 2005; 75,000 warrants through December 5, 2006; and 20,000 through June 25, 2006. Warrants for 50,000 shares at $1.205 per common share were exercised in February 2005.

6,294,917 shares were outstanding on June 30, 2005.

CFO promotion on April 25, 2005

Based on this, I'd say they're worth at least a dollar per share. Shares are selling for $1.20, which puts this one on the borderline for further investigation. The real question is how much additional market share they'll get/steal.

UPDATE Dec 24, 2006:
A quick look at their Q3 2006 results and I'd say the stock is worth over $2.00 per share. Earnings have gone up by 40% from the prior year. Balance sheet looks pretty good. Cash flow looks pretty good. Of course the stock has gone up to over $2.00. This is what happens when you focus on only getting the low hanging fruit: you miss a lot of good stuff. So here I am, about to make another pass through the pink sheets and this makes me wonder if I should be spending more time looking at a smaller set of companies in greater detail. Is AVEE going to double again in the next year? I have no idea. Investors who have put any significant amount of time into looking at AVEE can pretty much ignore what I've written: they already know more than I do about it.

Moro (website), a construction materials and HVAC business, has gone dark. They issued a 15-15D on Dec 22, 2004. Their last quarter showed them to have a reasonably healthy balance sheet, and profitable. Gross margins were around 18%, net income above 3%.

David W. Menard, 66, an investment banker, is Chairman, CEO, CFO, President, chief cook, and bottle washer. He owns about 70% of the company.

They've been on an acquisition binge. Whether this is good or not, I don't know. But they profess to have a value investing mindset, which is good but not sufficient.

The stock is selling for 87 cents. They're on track to earn 20 cents in 2005, which would give them a P/E of less than 5.

They do post results, but pink sheets and Yahoo don't save them long enough to see Q1 results, just Q2 results

I'm not investing in them. It sure is wonderful to be able to pass on stocks with a P/E of less than 5.

Halter Financial Group touts their reverse mergers: AVEE, CAAS, CAGC, CBBT, CHDW, DXPE, KMGB, PGJ, SZI, TBV, TLF.

Companies are nowadays raising capital in addition to a simple reverse merger. They cite China BAK Battery, who Halter handled.

...even though an exit strategy exists, which also appeals to investors, liquidity is virtually non-existent for a period of time after a merger. Case in point: Over July, August and September, China BAK's daily volume averaged about 1,600 shares.

Even so, the deal was oversubcribed with 17 funds and several individuals taking part in China BAK Battery's placement.

With new rules requiring reverse merger companies to submit 10-K quality financials immediately upon completing the transaction, reverse mergers typically take about 45 to 60 days to close after an audit is conducted, Halter says. By comparison, it took the SPAC Millstream Acquisition Corp. about seven months to complete its combination with NationsHealth, a Medicare supplier of medications that also provides discount drug cards.

No way would I ever invest in a blank check company. It's just spinning the roulette wheel hoping they actually buy some decent business at a good price (two ways to go wrong). They mention ESNR which I passed on as an investment:

His firm [Richardson Patel], along with Gottbetter & Partners, represented homeland security company Electronic Sensor Technology in its $4.1 million raise in conjunction with a reverse merger in February [The stock went from $2.40 to 34 cents]. 'There are a lot of great private companies that are in revenues with significant EBITDA that could be great public companies. But liquidity is the name of the game, and so investors are requiring a simultaneous reverse merger as a condition to getting the money.'

Regarding pink sheets stocks:

Halter, who was involved in the Uni- Pixel reverse merger, downplays the significance of a Pink Sheets listing. All APO companies intend to list on the Nasdaq or AMEX, he says, and Pink Sheet companies first must go through the process to become a reporting company. 'In all instances, it's a company's fundamentals that determine whether it qualifies for a listing, and all these companies qualify going in,' he says. 'Investors wouldn't put their money in unless the companies qualified and planned to list.'

A lot can go wrong on the road to being a reporting company. Passing on FPGR as an investment was tough, but I just couldn't invest in them. Great results are only great if they're real.

To date this year, the largest concurrent reverse merger and PIPE occurred in June, when the cutlery, appliance and gadget icon Ronco Corp. issued some $13.3 million shares of Series A convertible preferred stock to raise $50 million and merged with Fi-Tek VII.

I saw that one and the company claimed to have no operations. It must have been the shell company, although it had the Ronco name in the financials. This more recent 8-K looks better, although it's losing money horribly, tons of inventory, crappy cash flow, etc.

World Capital Market seems to be a big player in Chinese reverse mergers. They handled PetroChina which Buffett invested in. They also handled GBLP (selling at full price, I'd say).

I missed an interesting conference on reverse mergers. $895

In this article in 2004, Tim (not Charles) Keating of Keating Investments LLC says "There is a slew of Chinese companies lining up trying to go public in the U.S."

...the downside, it also can mean little exposure to the investment community. A company can get forgotten among more than 3,200 Over the Counter Bulletin Board (OTCBB) stocks and more than 4,000 stocks on the "pink sheets,"

The article talks about Sorel which I covered earlier (calling it Sorel incorrectly)

SORL has a market cap of $80 million. It had $33 million in sales last year and expects $46 million this year. Keating and its Chinese partner charged it $400,000 in fees and also got 4.5 percent of the newly merged company. The money for the shell, Enchanted Village Inc., came from Keating Reverse Merger Fund LLC, which was formed to invest in shells and also in private companies planning to reverse merge into the shells.

This one was priced about right so I passed. They also talk about Catalina lighting fixtures which I looked at years ago (pass, along with JUNO lighting fixtures which has a funny story related to the Juno ISP company).

This PDF file has some good background material.

The Wall Street Journal had an article in June about reverse mergers.

Excluding deals with Pink Sheet companies, there have been 55 reverse mergers so far this year compared with 89 for all of 2004, according to the Reverse Merger Report, a trade publication. This year's deals include private China-based businesses, fledgling biotechnology companies and software companies.

Compare that to the IPO market, which has seen 83 issues this year -- well off the 251 of 2004, according to Thomson Financial.

The article goes on about "There are pitfalls with reverse mergers, but they have become a lot more legitimate and popular," says David Feldman, managing partner of New York law firm Feldman Weinstein LLP. That website has links to other items by David Feldman.

Cyberkinetics Neurotechnology Systems Inc. went public last October. And no initial public offering, for that matter. Instead, the Foxborough, Massachusetts, medical-device company merged with an existing shell company: Vancouver, Canada-based Trafalgar Ventures Inc, registered in Nevada in 2002 for the purpose of mining copper, nickel, and platinum.

Cyberkinetics, which develops interfaces between computers and the human brain, is widely regarded as a well-run, respected young company, even if its combination with Trafalgar could have given some investors pause—or shivers. (Trafalgar’s original Securities and Exchange Commission filing noted that “to date, we have not conducted any exploration activities.”) But Cyberkinetics is far from alone in choosing a “reverse merger” into a shell as its way of taking itself public. In January, Worcester, Massachusetts, biotech firm Advanced Cell Technology Inc. merged with Two Moon Kachinas Corp., a four-year old Utah firm created to sell wooden Hopi Indian statues over the Internet. (Like Cyberkinetics, ACT kept its old name after the merger.)

There's a lot of fraud going on, but everything I've read indicates the fraud occurs in the shell company itself rather than the merged company well after the merge has settled. Also the fraud is more typically perpetrated against the merging business by the owners of the shell.

Some businesses don't realize that they need to file SEC statements.

Darren Ofsink seems to have some extensive experience in the field. He gave a presentation at the recent PIPEs conference (private investment in public entity) and recently worked with Brightstar.

Darren Ofsink’s legal experience includes assisting a variety of Chinese companies to become public through reverse merger transactions. Learn about the recent “SAFE Circulars” and hear first-hand accounts of financial and regulatory issues that impact investing in Chinese companies and bringing these companies public in the U.S.

Solitron Devices (SODI)
SODI popped. It was at about $1.50 and went up as high as $3, currently $2.20. No news, except dropping their auditors.
Obviously still not interested.

American Dairy (ADY)
This was selling for $6.75 and I didn't trust it. It went up to $8 and it's down to $7.80. Q2 results were good. Net income was 18 cents diluted. But cash flow was terrible due to a huge deferred income larger than net income.

They announced Q3 guidance. Sales would be about the same, maybe less than Q2. Diluted income about the same as Q2.

And of course they left the OTC BB, so they're legit now.
Not interested

Big Apple Bagels (BABB)
I figured they're worth about a dollar a share, which was the stock price. Now $1.26.

They announced results for Q3. Revenues down from prior year. 2 cents income vs 4 last year. They paid dividends as usual plus a special 6 cent dividend.
Not interested

New York Health Care (BACL)
Wow, actual revenue.
Not interested

Credit Acceptance Corp (CACC)
These guys are competitors to NICK. They were difficult for me to understand. Fortunately, there was a Q&A 8-K issued which has some stuff in it.

A lot more dealers are paying the fee in 2005 than 2004, which is good.

The issue about loaning to dealers vs consumers went to the SEC with at least no big problems, as far as I can tell.

No other new information. I had figured free cash flow to be about $1 per share. The stock price is now $14.75
Not interested

China BAK Battery (CBBT)
On Aug 10, it didn't seem cheap. The stock is about the same price. They filed a 10-Q and also did a placement.

The balance sheet sure did change. Current assets moved up the sheet. Total assets increased 30%. Equity jumped, obviously added capital (8.6 million new shares of contributed capital vs an original 32 million)

Revenues way up, gross profit up. 8 cents a share vs 5. Cash flow is only half of net income, due to AR.
Not cheap enough

Caprius (CAPS)
This was the medical waster neutralizer product. They had terrible P&L. But a new quarterly report is out.

Balance sheet is pretty good. Revenues are actually lower!
Not interested

Triangle Multi Media (QBID)
The Gay Channel or whatever. Apparently, they're working on audited results. Lots of glorious percentage increases mentioned, but 100% gain from almost nothing is still almost nothing. They claim that they're worth 10 times more than their market cap.

Subscribers -- Q Television's subscriber base is currently twenty-two thousand, and its expected subscriber growth rate going forward is twenty-five percent per month.

They're serving up some star power for brunch, apparently. If you asked me, they're trying to be a bit too in-your-face gay.

They landed an account in Chicago, which is good.

The stock is actually down from when I looked at it before, if that's even possible. 10 shares per penny. Of course they have billions and billions of shares, which is... um... silly.
Maybe some interest

China Cable (CCCI)
They issued a 10-Q after I looked at them.
They still have a 1-to-10 current ratio. And revenues are only up about 13% or so over last year. Operational loss is about 10% of revenues. Net loss is about 4 times more.
Not interested

C-Chip Technologies (MANS)
Let's see if they could get any worse.
Just more mousetrap stuff.
Not interested

China Digital Media (CDGT)
This was the cable operator whose CEO is into paintball. They had earned 2 cents in Q2 and the stock was at $2.50. Well, the stock is down to $1.55, which is good.

They launched an IP based set-top box. Very interesting. They also added 35 TV channels for Nanhai. The annual subscription rate is $15 to $74.

Remember that TV is very big in China, even more than the US. UPDATE: On a per-capita basis, they're low with about 300 tv sets per thousand people, but the total market is huge, especially in the cities where cable is.
Maybe some interest

China Education Alliance (CEDA)
No news whatsoever. The stock price is 35 cents (was 32 cents). I had been suspicous before and nothing's changed.
Not Interested

China Evergreen (CEEC)
The stock has stayed about where it was since the 40% one-day gain. The ask is now 28.5 cents.

On Sept 14, 2005, they announced completion of a $4.8 million placement. Shares at 15 cents and a 5-year warrant for the same number of shares at 20 cents. The central government has targeted a 90% wastewater treatment rate by 2030 (generally around 25% in 2002). Most of the new plants will be BOT (build, operate, transfer), contract term is usually 20-30 years, gov owns the land, capital return period is 5-6 years. You figure contracts are worth 3-4 times the invested capital. At 30 cents, you'd be buying in at more than 2x incremental book value (i.e. what the company is paying for incremental capital). If you take Buffett's rough gauge that options are worth about 1/3 the strike price (these have 5 year expiration vs typical 10 year) and you're paying 3 times as much as those in the placement. I'm thinking it's probably priced about right, especially since I wasn't all that thrilled with the company anyway.
Maybe some interest at the right price

COR Equity Management (CEQH)
Still a self-parody.

China Finance Online (CHFI)
I was probably too concerned about competition and inevitable winners. This company is in the game early and thus has an advantage.

The stock is roughly where it was, at 40 cents.

The company sold all its shares of CHID at a 5% discount from the market. No other news. The Shanghai stock market seems to be doing OK, although it dropped a bit since mid-September. The main index is about the same as it was when I looked at the stock the first time.

China Energy & Carbon Black Holdings (CHEY)
Nothing new from them after making the world's stupidest acquisition.

Avalon Correctional Services (CITY)
Nothing since February. Stock is largely unchanged.

and good old Malibu Cola, Calcol (CLCL)
Nothing new.

Sorel (no website) manufactures and distributes air brake valves and hydraulic brake valves for trucks and buses in China. Yet another Chinese reverse merger effective May 7, 2004. Previously The Enchanted Village.

The company owns 90% of Ruili Group Ruian Auto Parts Co., Ltd. a sino-joint venture.

42 customers, including all the truck manufacturers in China. Largest 3 customers were 31% of sales in 2004.
FAW Qingdao Automobile Works 18.83% (one of the top 5 carmakers in China)
First Auto Group Purchase Dept 6.96%
Liuzhou Special Auto Mfg Co 5.48%

At the end of 2004, nearly all of their current assets were trade receivables. There was also some PP&E.
Liabilities are AP and bank loans, all current.
Current ratio is OK.

Revenues were $46.8 million in 2004 (up from $33 million in 2003)
Gross profits: $10.9 million (up from $6.9 million)
Net income: $4.8 million (up from $1.2 million), 76 cents per share.

Stock price is $6.45, P/E of 8.5 based on 2004.

Cash from from ops is fairly ugly due to the huge increase in trade receivables.

Trade receivables continued to increase during the first half of 2005.
No taxes.
22 cents earnings in first half of 2005 (P/E starting to look more like 15)
Number of shares held steady
Cash flow from ops continues to be very ugly

Some of these stocks I know aren't going to be very good, but I want to scan them quickly anyway.

These guys are covering Sorl.

I haven't been blogging any of the YaSheng news.

Q1 Results

Balance Sheet
This is largely unchanged, although inventories and AR are down slightly from year end.
AP is down more, debt is down.
Equity increased by around $13 million.

Income Statement:
Revenues are down slightly from Q1 '04
Gross profit is unchanged
SG&A is up 2.7%
There's an error in the statement: Q1 '04 total operating expenses don't include "S", just "G&A". The error isn't propagated.
Operating income is down slightly.
Net income is nearly the same.
9 cents a share again.

Cash Flow:
There's a huge difference in depreciation. In Q1 '04, depreciation is $1.9 million. In Q1 '05, it's $11 million. This is propagated, so it's not a typo or anything like that. When I look at the 9 months cash flow from the SEC 10-Q for Q3 '04 (and here), it looks normal. YaSheng is supposedly working on getting audited results right now. I'll bet they're getting a lot of work from the auditors.

Cash flow from ops dropped from $35 million to $28 million. Capex increased from $1.4 million to...huh? I've never seen this before. Capex in Q1 '04 was actually a negative $1.4 million. It's more normal in the SEC 10-Q for Q3 '04.

Capex was $13 million, leaving $15 million in apparent free cash flow. There was $15 million for an acquisition, but YaSheng backed out (see 4/1/05 press release) and the acquisition cash was backed out in Q2's cash flow statement.

Speaking of mistakes, I had passed on YaSheng but then changed my mind and invested in them based on what I saw in the Q2 results, but I didn't go back and write down everything in the blog. I missed the red flag stuff above and let's find out what other mistakes I missed in the Q2 results besides the two items I made fun of.

Q2 Results

On the balance sheet, I'm looking mostly at the differences from Q1, but also looking for any weirdness from year end.

Balance Sheet:
Cash holds steady
AR is up from Q1 and Q4.
Inventories are down slightly from Q1.
PP&E continues to grow by a large amount. This is definitely a capital intensive business and growing the business is eating cash.
AP continues to drop

Income statement looks very good from a does-this-make-sense perspective. Earnings are up to $22.6 million or 15 cents/share.

Cash Flow:
Depreciation is spot-on here for both years.
Cash flow from ops is $57 million.
Capex is $42 million, leaving $15 million free cash flow (none in Q2).
They paid $3 million cash in taxes vs $1.5 million in prior year.

I found YaSheng's old website, which is interesting. Glorious development.

All the rest of the press releases are useless hype.

[Updates from Dec 8, 2006 are in purple]
Reading an editorial in the Wall Street Journal about Taiwan convinced me that I'm clearly doing the right thing with this blog.

Borrowing a page from George Orwell, the U.N. also celebrated its anniversary with a poster in the lobby of its famous but decrepit headquarters, on which it advertised a display of "Original Signatories of the U.N. charter." Except they weren't. The original signatory for China of the U.N. charter was the Republic of China [Taiwan]. In the 2005 U.N. version, the signatory listed was "China, People's Republic of." Informed of this Turtle Bay twisting of history, Mr. Hsia wrote to U.N. Undersecretary-General Shashi Tharoor, noting, "It is hard to imagine how the U.N., perhaps the world's most important international organization and one which is widely counted on to preserve the truth [don't make me laugh], could allow itself to blatantly deviate from history and misinform the world about something so fundamental to its history."

The U.N. did not write back, says Mr. Hsia, nor did the U.N. correct the mistake. Instead, in the finest tradition of Orwell's memory hole--the poster simply vanished.

Even with a blog, it's very tempting to make your mistakes simply vanish. Having a blog is like having an outsider parrot back to you everything you said. Allowing those mistakes to remain is a good idea. It points out inconsistencies that should be fixed and/or acknowledged rather than covered up. [inconsistencies are fine and worrying about them often causes mistakes]

I haven't noticed any unusually large mistakes lately, although I probably will in the future and I have in the past. The temptation is enormous to simply make them disappear. [I've noticed over time that allowing them to stand makes it easier to recognize and admit future mistakes] Minor errors generally do disappear down the memory hole. I generally don't emphasize larger errors. I believe buying shares of Bank of the James and SCCB were mistakes [BOJF definitely wasn't a mistake and I don't think SCCB was, either]. I dumped them and quietly removed them from the blogroll a while back.

I've been able to see characteristics that I wouldn't have noticed without an explicit blog. A lot of the variation in detail is on purpose, but some of it is pure laziness.

Outsourcing the mundane work was an excellent idea and I plan to continue outsourcing (hopefully at higher levels). But I think parsing the financial statements can never be outsourced. I pick up a great deal of information from unexpected details: how they explain the business, what words they use in the notes, the structure of the documents.

I believe that's an important question to routinely ask yourself. My experience is that it's usually surprisingly easy to find out what you're doing wrong with almost anything. All you have to do is honestly look for the answer. So then what I am doing wrong?

Am I not throwing enough money at obviously good investments? I don't think so. [agreed]

Have I picked a really bad investment and overlooked important red flags? I think EDAC probably shouldn't have been an investment [that's right], although it wasn't a terrible choice. I also think Strathmore wasn't a well grounded investment [unlike LVLT which is still unresolved after 4 years, Strathmore, and uranium, was correct] although with the price of uranium up to $32 now and the stock price down, I believe it's worth holding onto [yes!]. But history shows us that supply and demand equations can be totally upset by unexpected efficiencies in resource usage [I now worry about Russian HEU flooding the market]. Take garbage dumps. Many of us believed that garbage dumps were filling up and that we would face a real problem with waste disposal. Hardly. The technology of garbage handling has actually caused capacity to increase over time, while the number of active dumps declines.

So I should never again make an investment based on a supply/demand imbalance again [wrong] (although I probably will, but at least I should set the bar very high [correct]). I see that other uranium mining companies are boasting about their greatly improved methodologies. That doesn't bode so well for Stathmore. Am I making a mistake by continuing to hold the stock? That's worth pondering, but the imbalance is enormous [yes, and things go wrong, like Cigar Lake] and the entry of Uranium Participation showed that the supply isn't as exhaustive as it might have seemed. The U3O8 prices are still going up [they'll double in a bit more than a year].

What else am I doing wrong? I worry that I could end up over-investing in China [I still worry about that]. I have another Chinese company in the works that I'm picking apart (actually I'm done but I haven't made a final decision yet). [I think I was talking about CXTI, which turned out to be essentially a 4+ bagger, although technically I made a huge mistake in buying it without fully grasping the toxic convertible issue] Am I focusing too much on pink sheets and OTC BB stocks? I don't think so. [I agree]

The Fannie Mae put option seems like it was correct [even though it flopped, it was the correct thing to do]. I hope it was also correct not to buy the 2007 put option because it was too expensive [almost certainly correct]. Opportunities can be lost. I didn't buy the Level 3 bonds in 2002 yielding 30% when I knew they would last at least 3 years. I didn't buy NOOF at $1 a share. I bailed out of VCLK even though I had every reason to believe it would continue going up above $4.40 [and it's still going up!]... impatience? yeah some of that... social proof issues? maybe some of that... it was a loss of confidence more than anything else. [I'm still hanging onto my CXTI stock at the end of 2006 and probably well beyond because of this recognition]

Which leads to ACLN. In hindsight, I probably lost more money in missed opportunities from a loss of confidence by making a mistake in ACLN than the money I actually lost in ACLN [I believe this even more today]. And I think that's a more important lesson [yep]. It was easy to learn how to avoid another ACLN. It was much harder to avoid seeing ACLNs everywhere I looked. As someone said about Barrons (Bearons): the bearish case always looks more intelligent and more responsible.

If there's anything for certain, I'll continue to make mistakes [you're about to make another huge one in less than a month, but it works out ok]. If Buffett keeps making mistakes even lately, what chance do I have? I believe the answer is to apply the methodology and rely on experience and do whatever is possible to have a higher batting average.

UPDATE: And sure enough, Bubby points out a mistake I made with EDAC in only backing out benefits from taxes rather than going further and adding typical taxes in, considering NOLs are running out. Not only that, but I said on TMF that you'd never read "I'll be selling..." on the blog, but then again.... The only good thing is that I had already scaled it back quite a bit.

So I think a double-check of the the basics is in order for the remaining investments. I believe that I've focused too much on looking for obscure problems and not enough on checking for garden variety errors.

UPDATE: I'm now out of EDAC and my portfolio took a permanent realized 1.8% loss thanks to a dumb mistake on my part, but a genuine thanks to Bubby for pointing it out rather than leaving me invested in something at full value with no apparent margin of safety. 1.8% is pretty much down in the noise considering the ranges of values of some of my investments and the volatility of some of these stocks (20% in a single day is ordinary).

UPDATE Nov 11, 2005 (Armistice Day): Constantly asking the question "What am I doing wrong?" is clearly a good idea. CXTI shows that doing a few things right can overcome a lot of mistakes [hehe] as long as I'm catching those mistakes early [yes!]. Is LVWD a mistake? I don't entirely think so, but I believe they're really eating into the margin of safety [agreed]. Strathmore? No [correct], the spot price of uranium continues to slowly climb as expected. With Level 3, I was betting on an eventual imbalance of supply and demand. With Strathmore, that imbalance is here now [exactly!].

I want to look at GACF (website) to get a better sense of CVU and EDAC, which are also in the airplane repair business (maintenance, repair, overhaul: "MRO"). On a side note, I'm no longer banned from the pink sheets website so I'm going to start linking to them again. Yes, I did get around the ban by using an offsite shell account (could have used TOR also, thanks Terran).

GACF is a holding company. 97% of their operations are through wholely owned subsidiaries Hamilton Aerospace Companies ("HAT"), Delaware (82% of revenue) organized 1997 and acquired 2002, and "Word Jet" sic [it's right there in the intro of their 10-K, later on they spell it correctly] ("WJ"). WJ is 15% of revenue, organized Jan 1, 2004, Nevada, located Tuscon. The other revenue is a contract with Mesa Airlines starting in Q3 2003. Mesa wanted to work directly with Global and not a sub, although the work is done by HAT. All work is on commercial passenger and cargo planes.

GACF paid $2 million for WJ: cash, debt, and stock at 50 cents (now $1.42).

HAT is licensed by FAA and European JAA. Handles narrow-body transport aircraft, including interiors, converting passenger planes to freighters.

Little guys like GACF are important because:

1. Only FAA certified repair facilities can modify, service, repair planes. This would hurt GACF in the event of consolidation since the larger airlines would have their own repair shops.
   
2. Repair stations are required for mandatory inspection and maintenance. Still no help in the event of consolidation.
   
3. Due to economics, most operators rely on repair stations, often entirely. Again, consolidation would change this.
   
4. Repair stations are often used to tear down, part out, and sell the parts of inventory planes. This might not be harmed as much by consolidation.
   
5. Due to their closeness to operators, repair stations are often first to learn about good deals on parts. Not after consolidation.
   
6. Even when airlines park their airplanes during downturns, the planes still need to be inspected and stored. Yeah, ok.
   
7. Good working relationships with everyone in the business. Not after consolidation.

I think that extreme consolidation down to just a few players would knock these guys out of business. But a more realistic scenario of limited consolidation would only hurt them partially... maybe. But a big trend is horizontal markets and GACF could actually benefit from any increased outsourcing.

Fuel price increases hurt the business because less fuel efficient older aircraft are most of their business.

HAT has increased market share. They handle most of the turnaround maintenance for airlines operating out of Tuscon (yeah, there's a major hub). They have specialized experience for FedEx (engine hush-kit). HAT holds FAA Air Agency Certificate #HOCR426X authorizing it to do specific operations on: B-727-100-200, B-737-100/200/300/400/500, 757, DC-8, DC-9, and some P&W engines and a GE engine. HAT also holds JAA certificate 5903.

routine minor and major maintenance
corrosion control and prevention
structural inspectionsavionic upgrades
interior reconfig
strip and paint
comprehensive systems and structural mods
flight test support
component overhaul

HAT handles heavy maintenance "C-check" and complete overhauls "D-check".

Maintenence and Service Agreements ("MSA") are generally fixed-price labor-only, with a cap on hours for unforeseen repairs. Parts are either provided or purchased by HAT and sold to operator.

Some long term customers have umbrella agreements: Jetran International (737, DC-9, MD-80, JT 8D engines), Pegasus (office in Istanbul, 14 airplanes corporate and fleet, 737/400, 737/800), Falcon Air (Sweden, they do their own A and B checks on 737-300/400/500/600/700/800, unspecified work on 757, line A checks on ATR42-200/300/320, operate at Malmo-Sturup airport in Sweden for Britania Airways, Sterline European Airlines, Fly Me).

Customers: Shaheen Airlines (Pakistani domestic only airline, 737-200 and A-320 only), Teebah Airlines (Jordanian aircraft leasing company but really owned by Sheikh Hussain al-Khawam who heads one of Iraq's biggest tribes and was apparently involved in the Oil-for-Food/Fraud, looking to buy a widebody, also HAT is helping build Iraqi Airlines among other things), Jetran International, an aircraft trading and leasing company, Falcon Air Express, a 121 United States passenger operator, Aero Micronesia, a 121 freight operator, Aero California, a Mexican airline, Pegasus Aviation, a large aircraft leasing company and long-time Hamilton Aviation customer, as well as a number of smaller customers.

2 largest customers are 80% of revenues in 2002, 43% in 2003, and 36% in 2004.

Shaheen Airlines 26% of revenue (Pakistan)
Teebah Airlines 16% of revenue (Iraq)
Jetran 13%
Falcon 13%

HAT is 37% of WJ's revenue.

HAT just entered the 757 market. HAT's target market is 25% of the worldwide commercial aircraft maintenance market. They started out with Tier 2 operators of older aircraft and have been successful in expanding to Tier 1.

Damn!!!!! Blogger wiped out a bunch of my work. Now I'm totally demotivated since this is starting to look ugly. It talked a bit about WJ's business (which ended up not being terribly important), also Evergreen International Aviation is a massive competitor not far from HAT, privately held. They handle just about ever kind of plane and have the largest facility in the world. Very scary. Also there's Tramco which is owned by Goodrich. Goodrich mentions PEMCO (which I looked at years ago) as a competitor. Goodrich MRO seemed to be increasing perhaps 15-20% during 2003 and 2004.

Some competitors are doing badly and could possibly drop prices to get cash flow or market share.

Since 9/11, 5 repair stations have either stopped or filed Chapter 11. This is good for GACF.

Rotables are serialized parts of airplanes tracked by the FAA. Consumables are things like oil, grease, tape. Expendables are things like bolts and rivets which are not serialized.

The Boeing 2003 market outlook report projects passenger growth of 5.1% per year over the long term, cargo up 6.4% per year. Global MRO market is $40 billion with airlines doing half of it.

150 employees at HAT, capacity can be 500 in 2 shifts. 20 at WJ. Pima Community College has been training mechanics since 1991, new training center next to HAT. HAT works closely with Pima to apprentice new students.

while aggressively replacing those key employees who, after given a reasonable opportunity to do so, fail to successfully meet their job requirements. While this may seem harsh, the critical public safety issues associated with commercial aircraft maintenance require that HAT quickly identify and address any shortcomings in the oversight of its activities.

The lease of the airport facility was originally on a year-to-year basis because HAT/GACF didn't have the capitalization required by the airport for a muli-year lease. After a private placement (506/D) HAT now meets the requirement for a multi-year lease.

Don't forget the risk of doing 82% of business in one location.

The HAT facility is at the Tuscon International Airport, with 360 days average sunshine, very low humidity. 22 acres on the northwest ramp, within the airport itself (which provides security). Lease is $25,650/month. 2 hangars.

The WJ facility is 73K sq ft in Tuscon, directly across the street from HAT.

Company took on extra business in Q4 2004 which would decrease profitability in the short term, but enhance the long term (probably crappy margins in outsourcing).

Legal Proceedings:

June 2004, GACF initiated lawsuit against Corwin Foster and wife and Seajay Holdings (Michigan, limited liability), US district court. Requested return of 1.5 million shares of stock. Part of stock exchange agreement. Old Mission Assessment agreed to provide financing for HAT. Foster was officer. HAT received only $400K of the agreed upon $3 million. GACF returned the money and is seeking damages of $1 million, the return of the shares, and punitive damages of $10 million.

Sept 17, 2004, James Scott filed discrimination complaint with AZ State Atty Gen, claiming he wasn't re-hired because of his race. GACF claims he was eligible, he was employed by Job-Aire Services (temp service for aviation), released, and designated not eligible for re-hire. Performance issues at HAT during a previous placement by Job-Aire. Dude, if you were good, they'd be scrambling to hire you regardless of race.

Sept 7, 2004, Murphy Emelike filed a discrimination complaint due to race. He failed to report to work and Job-Aire filled his position with someone else who did report to work. Dude!

Let's skip ahead now to the financials.
The discussion of the results of operations is very long and detailed. Ugh.

Lots of fixed costs (rent, insurance, debt payments, certain salaries), fluctuating business revenues. yeah yeah...

Revenue doubled in 2004. Hours worked increased quarter by quarter.
Q1: 40K hours
Q2: 46K hours
Q3: 56K hours
Q4: 100K hours

GACF scored a multi-million dollar consignment inventory which will help WJ revenue.

HAT does well when customers want "nose-to-tail" work. HAT accepted work in excess of labor capacity to establish relationships with new customers, who will probably need nose-to-tail work.

Starting in Q1 04, HAT focused on selective work booked with a smaller and highly skilled and stable workforce (presumably without James Scott and Murphy Emelike). Labor costs decreased by $195K in Q1 (5% of revenue).

GACF got fined by the IRS for delinquent payroll tax. Based on the discussion, it sounds like this was an intentional trade-off.

In Q2, 90% of HAT revenue came from the top 5 customers. 41% of WJ revenue was from top 5. The discussion of Q2 includes examples of focus on profitability over just plain revenue. yeah, it makes sense. There's some factoring of receivables.

etc. etc. So they've started dealing tactically with revenue and profits, which is good. The details of how they ran the business are good. But this business should be priced cheaply, with everything taken into consideration: perhaps 12 times roughly average earnings.

HAT full year:
Gross margin: 16%
Net margin: 8.7%
Global's direct business was unprofitable so those numbers should be a bit lower, not much.

WJ is more profitable.

Overall 2004:
$31 million revenue
$24 million COGS
$2.5 million net profit

Overall 2003:
$15 million revenue
$12 million COGS
($1.3) million loss

It seems like the profits of 2004 are at least somewhat sustainable. During 2003, HAT results were improving and this continued into 2004. But conservatively, I'd assume perhaps $2 million in profits on average going forward, for pricing the company.

May 2004, private placement of 9.6 million shares priced at 34 cents a share (ugh!), with all sorts of warrants. Net result is 24 million shares in exchange for $18 million.

Sept 2004, private placement of 2.1 million shares total for $1.1 million (ugh again!).

Salaries are very reasonable.
Directors and officers own 17.7% of the company.
Barron Partners owns 31.3%.
No related party stuff (except on the balance sheet!!!)
Unqualified audit opinion by a single auditor.

Balance Sheet
current assets are split between AR and inventory, everything else is in the noise.
PP&E is only about 12% of assets
liabilities are mostly AP, with some billings in excess..., accrued liabilities, and due to factor
They had negative equity in 2003, but the placements really cleaned up the balance sheet. You can tell they were sort of in trouble in 2003, which explains the IRS issue and the placements.

They earned 10 cents diluted, but based on my notes, I'd assume earnings of about 8 cents (instead of using my 12 multiple above), making the company worth about $1.2 dollars based on earnings (current stock price is $1.43).

Cash flow is downright ugly. Operations burned $1 million.
$1 million non-cash gain from renegotiating a contract
$3.6 million increase in AR (offset $2.3 million by increase in AP)
$1.6 million increase in inventory
etc. etc.

$1.3 million capex.
Yeah, they really needed the placements!

I still need to cover the notes, but this company isn't all that interesting to me right now.

UPDATE: Looking at Q2 results only reinforces my opinions. I swear I didn't cheat when I picked 8 cents.

UPDATE: I wonder if the hush kits for FedEx jets is because they fly overnight and land very early in the morning?

“To be Directed by the Great Schoolmistress of Reason, Experience. And not to be ruled by groundlesse fantcys & conceipts.”

from the minutes of the Royal Society in the 1600s, written by Robert Hooke, lost for the ages until discovered in a cupboard in 2006, documenting the birth of modern science

This is my recommended reading list. I figure I might as well post it on the blog. I read these books and then I try to let them go.

BUSINESS

The Accounting Game: Basic Accounting Fresh from the Lemonade Stand
An outstanding source of learning a truly intuitive understanding of accounting. This helps create a foundation of understanding business. Despite it's comic book style, it dives into some fairly complex issues. I've read many of the books on analyzing financial statements and this one remains my favorite because I find the intuitive feel is extremely important for mapping between what you read on a balance sheet, for instance, and what that corresponds to in terms of an actual business. A lot of people I've recommended it to have also found it to be a valuable intuitive view of accounting.

The Practice of Management, by Peter Drucker (or better yet, The Essential Drucker)
Peter Drucker is to management as Ben Graham is to investing. This book is a classic from the 1950s that has never been outdone. When I read this book in the 1980s, I was amazed at how much better it was than all the management books of that time. This book is excellent for being able to differentiate good management from the bad.

Innovation and Entrepreneurship, by Peter Drucker
This is a truly profound understanding of what it means to innovate in a systematic manner. I read this in the 1980s and it has helped my understanding of business competitiveness ever since.

The Armchair Economist
A simple introduction to the principles of economics. It's not a textbook, but it helps in understanding the laws of economics and these laws are often counterintuitive. Lots of people have been tripped up by not understanding them. If you like this, you might try Hidden Order: The Economics of Everyday Life or much better, Freakonomics, which I found to be as good as the Armchair Economist.

The 22 Immutable Laws of Marketing, by Ries and Trout
I recommend this book for gaining more understanding of the various competitive factors of business. It's an outstanding explanation of why some businesses succeed while other fail.

The Tipping Point: How Little Things Can Make a Big Difference
A great book with an interesting view of marketing. Unfortunately the concept has been abused beyond all hope (when the press says "...may have reached a tipping point" it means the writer has abandoned all objectivity and is rooting for some longshot cause).

The Soul of the New Consumer, by David Lewis
Kind of a "new economy" book, but has a lot of excellent observations of major trends in consumer behavior.

Why We Buy: The Science of Shopping
This is a great book by a group of people who study the behavior of retail customers. It covers a lot of what companies do wrong. It's a great book to read if you're going to do any sort of field research looking at retail companies. Darwin would be proud of their methodologies.


BUSINESS HISTORY
I've gained a lot from reading business history books. Many of them offer incredible insight into what makes a company good or bad.

Titan: The Life of John D Rockefeller, Sr.
One of the best books on business history I've ever read.

Chainsaw: The Notorious Career of Al Dunlap in the Era of Profit-At-Any-Price
Despite the sensationalist title, this books offers an excellent view into the inner workings of a bad business and, most importantly, gives an excellent example of the interactions between senior management, the board of directors, and money managers.

Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron, by McLean and Elkind
I actually haven't gotten around to reading this one yet, but it's recommended by either Buffett or Munger.

Bull! : A History of the Boom, 1982-1999
A good book on the bull market. If you had followed the bull market while it was happening, you probably already know most of what's in this book.

Les Schwab: Pride in Performance
This guy makes Sam Walton look like an urbanite. Real hardscrabble. He created an empire of tire centers in the Pacific Northwest from incredibly humble beginnings. There's obviously no ghost writer and it reads like a letter from your semi-literate octogenarian aunt who never ventured into a town with more than 50,000 people. But this guy obviously spent a lifetime figuring out how to run his business and, like Sam Walton's book, it's a long narration of lessons learned, obstacles overcome, and a wide variety of people and situations.

What I Learned Before I Sold to Warren Buffett: An Entrepreneur's Guide to Developing a Highly Successful Company, by Barnett Helzberg
The CEO of Helzberg Jewelers explains a lot of principles of good business. Pretty much what you'd expect it to be. Don't read this if you've already read lots of other business success stories.

Damn Right: Behind the Scenes With Berkshire Hathaway Billionaire Charlie Munger, by Janet Lowe
This is a good book which explains a lot about Munger. But it's not nearly as good as the Buffett biography.

Buffett: The Making of an American Capitalist, by Roger Lowenstein
This is an outstanding book which shows in great detail how Buffett achieved such great success. I hadn't read this book for a long time because I was concerned that it would have too much personal fluff and not enough investment details. But it contains good information for someone who wants to get better at investing.

Sam Walton: Made in America: My Story
Two things make this book great. First, it shows what it takes to succeed in retail. The behavior style of Sam Walton shows up frequently in successful retailers. Second, because this book was written for the purpose of instructing future generations of Waltons in the business, it offers a lot of personal and no-nonsense insights into how Wal*Mart was built and what makes it successful. It also shows the importance of accepting and correcting mistakes.

McDonald's: Behind the Arches
Great book on business success and creating a great and enduring franchise.

The First American : The Life and Times of Benjamin Franklin
I include this along with books on business history because it's such a great story of success. Franklin was arguably the most influential and important person to live in North America.

When Genius Failed: The Rise and Fall of Long Term Capital Management
It's amazing just how far things can go wrong when extremely intelligent people lose their bearings. This is a great book on the dynamics of the investment world.

When Giants Stumble: Classic Business Blunders and How to Avoid Them, by Robert Sobel
This is a good set of business history stories.

What Were They Thinking?, by Robert McMath and Thom Forbes
The author collects product failures and has an estimated 80,000 individual duds. This book is an excellent overview of bad marketing mistakes.

The 50 Best (and Worst) Business Deals, by Michael Craig
This is a good set of interesting business deals, with a lot of focus on why things went well or badly.

Forbes Greatest Business Stories of All Time, by Daniel Gross
Excellent set of short business stories throughout history: Cyrus McCormick and the industrialization of farming, John D Rockefeller, J. P. Morgan, Henry Ford, Charles Merrill (Merrill Lynch), Sarnoff (I know a guy whose father worked with Sarnoff before RCA), Walt Disney, John Johnson, Ogilvy, Ray Kroc, Xerox, Amex, Mary Kay Ash, Intel, Sam Walton, MCI, Harley Davidson, KKR, Microsoft. There's not a lot of depth, but it's better than nothing.


MENTAL MODELS: SYSTEMS, STRATEGY, CAUSE, AND EFFECT

Guns, Germs, and Steel, by Jared Diamond
One of the best books I've ever read about world history. This is a great analysis of cause and effect. A lot of people have raised justified issues with the book's conclusions, but it's still a great example of how to find answers to difficult questions.

The Third Chimpanzee, by Jared Diamond
This is the pre-quel to Guns, Germs, and Steel (what happened before civilization started) and is also a truly outstanding book. Again, a great analysis of cause and effect with a lot of game theory involved.

How the Scots Invented the Modern World, by Arthur Herman
The title is actually a spoof of How the Irish Saved Civilization and in my opinion, Herman was a total marketing moron for giving the book such a bad title, especially during a time of revisionism when every ethnic group in the world is making all sorts of silly claims. However, this is also one of the best books I've ever read about world history. It is an oustanding explanation of the complex interactions that occur within the various parts of modern civilization, but it focuses on the interaction between several key individuals. When you read this book, you'll feel like you were really there.

Thinking Strategically, by Dixit and Nalebuff
A great overview of applying game theory to strategic situations, including using the Nash equalibrium as a means of applying rational analysis to strategy. I found this to be extremely helpful in understanding competitive environments and being able to analyze a moat. However, there are other books that cover game theory and some of them are probably better than this one.

The Selfish Gene, by Richard Dawkins
An amazing introduction to evolutionary biology, the principles of which apply extremely well to any sort of evolutionary change, including the business world. This is an outstanding book.

Darwin's Blind Spot: Evolution Beyond Natural Selection, by Frank Ryan
This is an excellent discussion of symbiosis as a means of evolution. It also goes into some detail about how entrenched the "Darwinians" were, rejecting symbiosis in spite of clear evidence. Darwin would have rolled in his grave at the thought of scientists approaching new evidence without a rigorously open mind. I did read Darwin's Dangerous Idea, which is an excellent book that demonstrates how Darwin's explanation of evolution eats away at our cherished beliefs like an acid. It's a great book for those who liked The Selfish Gene.

Ice Age: The Theory That Came in From the Cold, by John and Mary Gribbin
Munger recommended this short book which deals with the difficulties in piecing together the various bits of unexpected evidence to understand what actually happened, and how it took a very long time and lots of people to do it. A key point is that it was such a low priority and often no one contributed to it for long periods of time. Those who did, often did so unintentionally. This is a great book, but I found it to be a bit boring at times. However, the discussions at the end of the book are very interesting about how we humans are very adaptable, general purpose creatures who seem to have emerged because of these huge fluctuations in climate that began fairly recently from a geological timeframe.

Deep Simplicity
Another book by John Gribbin, this is a good introduction to chaos theory (another horribly abused set of concepts). I'll never forget writing up an Excel script with a very simple random walk and ending up with an amazing fractal (take 3 points in a plane. Start anywhere in the plane you want. Repeat several thousand times randomly selecting one of the three points and moving halfway to that point and making a dot.) The book has a lot of more relevent stuff in it.

Voyage of the Beagle, by Charles Darwin
This is an outstanding example of science in action. Darwin learned key aspects of observation and retained a strong level of rigorous curiosity which led him to all sorts of great discoveries. Wikipedia has an great compilation of notes about Darwin's life's work.

How Buildings Learn: What Happens After They're Built, by Stewart Brand
This is an interesting book about architecture which applies to other areas. The main conclusion is that buildings consist of "layers" all of which need to change, but at different rates: appliances/furniture, utilities, nonstructural walls, etc. Bad buildings are ones which have layers mixed together so that appliances are built into the structure, or put too many limitations on future utilities, or lots of other things. Good buildings allow each layer to change independently of the other layers. Perhaps it's a stretch to add this book to the list.

Principles of Economics, by Mankiw
This is an economics textbook which is very good. I went back and read this after something else was recommended from Mankiw by Buffett or Munger. Mankiw is likely to become a key economist before too long. If you don't have a good grasp of economics and actually have the audacity to go through a textbook on your own, this is a good, but definitely buy it used. The most interesting concept I got from the book was that neutral elasticity means always buying X dollars of a good/service regardless of its price. This provides an excellent way to test intuitively whether something is on the elastic or inelastic side of neutral. I know this is probably obvious but I didn't know it.

UNDERSTANDING OURSELVES

Influence: They Psychology of Persuasion
For a while, I was focused on reading books that would help remove distortions in perception from my view. There are some good books on behavioral finance, but overall, I'd probably just recommend this book. I believe it's very important to understand and counteract your own irrationality.

The Winner's Curse
Similar to the Influence book. Very good book by the key pioneer in the field.

Devil Take the Hindmost: A History of Financial Speculation
An outstanding overview of financial bubbles going back to the tulip mania. It's amazing how similar they all are, including the most recent Internet and tech stock bubble. There's also the Extraordinary Popular Delusions & Madness of Crowds which I haven't read.

The Wisdom of Crowds
The opposite of Devil Take the Hindmost, this book shows how groups of people have very good judgement, but only when certain key criteria are met. This is a very important thing to understand when trying to compete against groups of people in making decisions.

Judgment under Uncertainty : Heuristics and Biases
This is a very academic book, but provides a great deal of detail on how people make systematic judgement errors due to their irrationalities. This is very useful as a means to counteract your own biases. Someone should take the main conclusions and distill them into a shorter and accessible book.

Blink
A great book by the guy who wrote The Tipping Point. This covers a surprising number of different facets of fast subconscious thinking.

Deep Survival
An outstanding book about human emotions, the role of adaptability in getting out of trouble, and why children 6 years old and younger tend to be more likely to survive being lost in the woods than an adult.

The Black Swan: The Impact of the Highly Improbable
An outstanding book about human bias regarding predictability. Lots and lots of useful ways of looking at things.

Race and Culture: A World View, by Thomas Sowell
This is a very interesting book which deals with groups of people, how their behavior determines their destiny, how their situation affects their behavior, and deals with cause and effect rather than right and wrong. The author (who also wrote other similar books such as Ethnic America) never flinches from reality and doesn't hide behind dogma or ideology. I bought Ethnic America in a discount book bin in Cambridge, Mass in the 1980s, presumably because it clashed with the victim culture of the indiginous liberals there.

The Millionaire Next Door, by Stanley and Danko
There is a huge difference in how people deal with money. People who try to look wealthy typically aren't. And people who are wealthy very often don't act like the stereotype. This book has two key points: 1) live below your means if you want to accumulate wealth, and 2) providing economic assistance to adult children is poisonous to them.


INVESTING

The Essays of Warren Buffett: Lessons for Corporate America
This is actually a fairly difficult book to really comprehend. It focuses heavily on the measurable/quantitative part of investing. I've read it three times and a huge portion of my understanding only happened on the 2nd and 3rd readings. I found this collection of Buffett's letters to shareholders to be more helpful than Graham's books.

Common Stocks and Uncommon Profits, by Philip Fisher
This is the book for the qualitative aspect of investing. You might also read some of The Motley Fool books as well, but this one really has the content. It was written in the 1950s and is still totally relevant today.

One Up on Wall Street, by Peter Lynch
This is a great book, similar to Common Stocks and Uncommon Profits. Peter Lynch ran the Magellan mutual fund for many years and had enormous success.

Beating the Street, by Peter Lynch
I actually haven't read this book, but it's supposed to be very good, with some good pointers about specific industries if I recall correctly.

The Intelligent Investor, by Ben Graham
The legendary book on value investing. In all honesty, I got a lot more out of Buffett's writings.

The Bank Director's Handbook: The Board Member's Guide to Banking & Bank Management, by Benton Gup
This is an outstanding book to read if you are interested in investing in any highly leveraged financial institution such as a bank. I would also recommend the chapter on fraud and the appendix of FDIC red flags to all investors. Reading them will give you a good sense for the patterns which occur when someone is trying to fool you as well as the conditions which are breeding grounds for fraud. Say what you will about the high cost of SOX, the single most important way to prevent fraud is to have controls and procedures in place and to follow them. Of course the real problem is that outright fraud isn't all that widespread in public companies compared to plain old waste, crappy management, and CYA behavior.
Also there's BankDirector.com

Wiley GAAP
This 1,100 page book covers the foundations of business accounting. It isn't even an exhaustive source of accounting rules. But it's a good reference to have and a good book to read cover-to-cover if you want to know accounting well.

Government Sponsored Entities: Mercantilist Companies in the Modern World, by Thomas Stanton
This is a fairly good book for anyone considering investing in one of the GSEs such as Fannie Mae, Freddie Mac, or Farmer Mac (or more likely if you're looking at shorting them).

Financial Statement Analysis, by Charles Woefel
This is a reasonably good book on understanding financial reports.

How to Read A Financial Report, by John Tracy
I didn't like this book as much as Financial Statement Analysis, but other people have liked it.

The Warren Buffett Portfolio, by Robert Hagstron
I really don't like books about how to invest like Warren Buffett, but this is one of them. I read it and got some good out of it. I've read others and wasn't impressed. If you really don't feel like reading Buffett's shareholder letters (either individually or the compilation The Essays of Warren Buffett), then this is a fairly good book.


STUFF ON THE WEB

Aesop's Fables
Always worth reading.

Spotting the Losers: Seven Signs of Non-Competitive States
This is a great article about what makes some societies failures and others successes. A lot of leaders in the Middle East should memorize it.

• Restrictions on the free flow of information.
• The subjugation of women.
• Inability to accept responsibility for individual or collective failure.
• The extended family or clan as the basic unit of social organization.
• Domination by a restrictive religion.
• A low valuation of education.
• Low prestige assigned to work.

Also, "unearned, "found" wealth is socially and economically cancerous..." such as oil. It's funny how this is also covered by The Millionaire Next Door on a microeconomic level (the disaster of economic outpatient assistance).

FP Group (website) makes the paper gift stuff you see at places like Hallmark card shops. They just landed a huge account with a large US cardmaker (I don't know if it's Hallmark or not).

Let's look at an unaudited financial statement certified by the CEO (who is in Hong Kong).
everything is US dollars

Balance sheet, August 31, 2005:
cash: $162K
AR trade: $1.6 million
AR other: $5.6K
AR related party: $702K
Inventories: $292K
total current assets: $2.75 million
PP&E: $989K, more than half depreciated
other assets: $8.9K
total assets: $3.75 million

note payable: $350K
capital lease oblig curr: $95K
AP: $965K
due related parties: $71K
total current liabilities: $1.48 million
noncurrent capital lease oblig: $716K
preferred stock 10 million authorized, none outstanding
common: 100 million authorized, 37 million outstanding
retained earnings: $1.1 million
total equity: $1.55 million

Income statement for 5 months ended Aug 31, 2005:
sales: $2.15 million (up slightly from year earlier)
gross margin: $689K
SG&A: $313K
operational income: $375K
net income: $355K
basic and diluted income per share: slightly less than 1 cent
all of this is slightly better than the year earlier
number of shares has been steady at exactly 37 million shares, although weighted average listed shows 40 million for some reason.

Cash flow for this 5 month period is bad. For other time periods, cash flow is not too far from earnings, but for the 5 months ending Aug 31, it's significantly negative (they list it only in HK dollars). Capex is about 2/3 of earnings.

Everything is depreciated over 5 years.
The statement looks kind of haphazzard.

Here's a 15c2-11 information statement:
Incorporated in Colorado
reverse merger on November 19, 2004
40.2 million shares issued, 3.2 million were offered on 12/16/04
14 shareholders
fiscal year ends March 31
no legal proceedings
SIC code matches their own business description (commercial printing)
no parents or subsidiaries or affiliates
650 employees, 400 full-time
4 major customers, loss of any 1 wouldn't be material (seems hard to believe)

2 properties: a small leased office in Kowloon ($19K/year), a manufacturing facility in Shenzhen ($128K/year). All are 60% utilized.

CEO: Wong Kai Tung (aka Leo Wong) controls most of the stock (24 million shares) via Sky Logistics Consultants Ltd (owned 90% by Wong)
CFO: Cho Chun Wai (Peter)
Director: Wong Kai Tung (Leo)
Director: Cho Chun Wai (Peter)
Director: Wong Kwok Biu, father of Leo
San Angelo Sunrise Investments (Dallas, TX), controlled by Mark Shelley owns 3.2 million shares

Leo Wong has a high school education and was a printing manager from 1997-2000
Wong Kwok Biu was also printing manager during the same time with a high school education

Cho Chun Wai was senior accountant for Linefan Technology Holsing Ltd 2002-2003
accountant for Ocean Grand Holdings 2000-2002
staff accountant for Gallium Electronics Ltd 1998-2000
1998 BA (Honors) HK Polytechnic U.
CPA 2002

David B. Stocker, Ltd
Lawyer in Phoenix, AZ.
rendered an opinion on the sale of stock (which is fairly limited, in real terms. no indpendent verification)
non-reporting company, obviously
sale followed Regulation D Rule 504 for limited sales to accredited investors of less than $1 million per year.

Unaudited financial statement
9 month results show earnings of 2.5 cents for 9 months ending Dec 31, 2004. 37 million weighted ave shares.
Cash flow from ops looks good with free cash flow matching earnings very closely.
Deprec offsets AR related party. AR other offsets AR. AP decrease is huge at $4.4 million. Increase due related parties is up $1.2 million.
Cash flow used in financing is mostly dividends ($5 million of $6.6 million). The dividend was paid in Sept 2004 before the reverse merger. Why?

The reverse merger required Johnstone Management Corporation to secure at least $500K of equity capital by Jan 31, 2005.

On Dec 16, 2003, 3.2 million shares issued for $249,600.

Jan 11, 2005: Added to the Pink Sheets

Feb 1, 2005: Chinese design firm created
Located in HK. FP owns 60% of it, the other owners are other design firms. One is JP & Associates (almost no info on JP). Initially 5 designers, increased to 15.

Feb 23, 2005: Q3 Results
Sales: $1.28 million (92% increase over prior year) some new customers, foreign importers
Gross margin: $344K (85% increase) roughly 28% margin
Net income: $230K (132% increase)

9 Month Results
Sales: $4.3 million (60% increase) primarily increased orders from existing customers
Gross margin: $1.2 million (58% increase)
Net income: $920K (140% increase)
net income per share: 2.5 cents

March 8, 2005: Partnership with Innotime
This is a clock manufacturer so FP can create a paper clock series (developed internally and proprietary).

May 16, 2005: Million Base acquisition should produce more growth in 2006, expect $800K of additional net income. FP issued an unspecified convertable note. Anything less than 26 million shares would be accretive, assuming they're correct about the $800K of additional net income.

May 23, 2005: New product launch
Paper music boxes. Target is 200K units in the first batch of orders.

May 24, 2005: significant growth in year ended March 31, 2005
Sales $5.7 million (from $4.1 million)
Gross margin $1.79 million (from $1.29 million)
Net income $1.1 million (from $786K)
basic and diluted earnings per share 3 cents (from 2 cents).
The increase was due to sales efforts expanding customer base and larger orders from existing customers. Targeting foreign importers.
This is all very good, with 40+% growth in revenue and income, but audited results are needed.

June 21, 2005: Acuiring a wooden box manufacturer
Entered into discussions with Jin Ye Wood Company, Shenzhen. Will take 12-18 months to finalize. Their goal is $50 million in revenue.

June 23, 2005: New production plant in Huizhou
Letter of intent. Planned for Q4. Will double capacity. The location is due to a major customer moving there. Should lower costs by 15%. Funded by working capital.

July 6, 2005: Expanded operations in China
FPGR opened an office in Guanghou for marketing/sales and sourcing/logistics. Three more offices planned in 18 months (Beijing, Shanghai, Ningbao). The goal is $30 million revenue. Reduced from June's $50 million for some reason.

July 12, 2005: Announces agreement with large US Greeting card company
FPGR will become "one of that company's contract manufacturers of greeting cards." Printing to be done in Shenzhen. Must pass a factory visit in early August by card company before moving forward. They expect $6 million revenues per year with 30% gross profits. Also discussing expanding to other paper products.

Some various links
Hong Kong business directory location doesn't match, but phone number does
Money Due and Owing court case of HK$598,808.03 (US$77K). FP was defendent against K.C. Ltd. This was as of Dec 2002.
An industry directory shows correct phone number
Some registry delisted Full Prosperity
Another directory listing
Someone did a credit report on Full Prosperity, address matches
...but then again, someone searched Fuk Yue Trading Company
Here's a paper clock made in the USA
Paper clock announcement

Good quality paper products provider FP GROUP LTD (FPG) announced that it will be presenting its new product line of paper clocks at a Clock and Watch Show sponsored by Million Base ('MB'), a Hong Kong based global sourcing and marketing company.

As previously announced FPG is in the process of acquiring a majority interest in MB. MB expects gross revenue in 2005 of approximately US$4,000,000 and net income of approximately US$800,000. This will significantly increase FPG consolidated revenue and net income.

FPG and MB expect that their line of paper clocks will be well received by those attending the show. The paper clock product is not only a time piece but can be used as gift boxes for small items such as jewelry and accessories. FPG's design staff works with customers to manufacture the clocks to fit special needs such as shape and size.

Comments and Conclusion
I don't know what to think about this company. The really big negative is the lack of audited results. The company is worth between 50 and 75 cents. Recent trades have been at 11 cents. To get into the company with any amount of money would probably have a cost basis of around 25 cents, maybe more. I'm not sure it's worth the risk.

UPDATE Oct 11, 2005: I've decided not to invest in FPGR because the combination of 1) CEO controls most of the stock, 2) the results are unaudited, 3) the $5 million dividend before raising a small amount of money going public, and especially 4) no response whatsoever to my questions from the company

I'm not going to have time to pick this one apart. Perhaps later. It's an interesting example that's worth the effort, even if it doesn't turn out to be an investment simply because of the wide difference between the accounting results and the cash flow results over a 5 year period.

FIFS (very lame website) is involved in sub-prime auto loans. I wish I had seen this one earlier, before the most recent quarter results came out.

Their assets are almost entirely the receivables held for investment (10 times greater than the next largest asset). On the liabilities side, it's almost entirely debt. They run at nearly a 10-to-1 debt to equity ratio, making it halfway to the leverage of a bank! In my mind, the gold standard for subprime auto lenders is Nicholas Financial (NICK) which is only about 2.5-to-1.

NICK has operating margins of about 42% vs about 2% for FIFS, but a lot of this difference is due to what seems to be massive provisions at FIFS. Even with NICK's provisions, they end up having to return a lot of that back into income after the static pool containing that loan is sufficiently drained.

FIFS has a huge difference between income and cash flow for years.
earnings vs cash flow
2001: $52K -- $12.8 million
2002: ($309K) -- $10.2 million
2003: $333K -- $17.4 million
2004: $34K -- $16.6 million
2005: $683K -- $15.3 million
capex was very small during these years.

On April 30, 2000, there were 5.6 million shares.

If you look at changes in equity, 2000 started with $28.9 million in equity. 2000 had a small increase of $226K, mostly from warrants.

2001 next year was dominated by a cumulative effect of accounting change which wiped out $2.5 million in equity, offset by a reclassification of earnings adding $820K. $515K for treasury stock purchases. The net change was about a $2.5 million drop in equity.

2002 had the $333K earnings, but also another reclassification of earnings adding $828K. $1.3 million treasury stock repurchases brought the equity back to a net change of essentially zero.

2003 had the $34K earnings, but yet another reclassification of earnings of $897K. Another net $120K in treasury stock repurchases and equity ended up about a million.

2004 had the $684K earnings. A huge $2.5 million treasury stock repurchases. Equity ended down about 2 million. Equity ended at $25.5 million.

Ending on April 30, 2005 with 5.6 million shares, but 1.17 million of those are treasury stock (purchased at an average price of $3.81 each).

If the company hadn't repurchased shares, equity would have ended at $30 million which would represent an increase in equity of $1.08 million over a 5 year period (or about $216K per year). Ignoring the effects of compounding, this would represent 3.9 cents per share increase in equity per year.

This whole sequence included the $2.5 million drop in equity in 2001 which was a cumulative effect from multiple years. If we start in 2002, the effective change in equity would be about $3.8 million over a 3 year period or about 23 cents a share per year.

I believe this would be a difficult business to understand.

Dynasil (website) fabricates synthetic fused silica (the purest form of glass) products for lenses, prisms, reflectors, mirrors, filters, lasers use, etc. Instead of essentially melting sand, they produce glass from silicon halide vapor. There are only two domestic suppliers in the US.

Q3 ended in June 30, 2005 (year ends Sept).

Balance sheet:
Cash $351K
AR: $732K
inventory: $867K
Current assets: $2 million
PP&E: $769K
Total assets: $2.9 million

Current notes and debt: $436K
AP: $333K
Current liabilities: $979K
long term debt: $637K
equity: $1.3 million

9 months (not very useful since most recent 3 months includes acquisition)
28% gross margin
3.4% operational margin
2.3% net margin
Earnings: $75K for 9 months (2 cents per diluted share)

Cash flow from ops is $49K (AR increased)
Capex is $49K... zero free cash flow

Acquired Optometrics LLC for $770K (only $78K over book value)
Optometrics had revenues of $4.9 million with $150K earned in last 9 months
Issued preferred stock worth $690K (700K shares paying 10% dividend and convertable into 2.222 shares of common)

436K stock options issued over the last 9 months
135K options were outstanding before that
3.8 million shares
4.4 million shares diluted (about 4.8 million totally diluted)

results for most recent quarter (includes Optometrics)
revenues: $1.6 million
gross margin: $516K
operational income: $80K
tax: $4K
net income: $56K (annualizes to about 4.7 cents totally diluted)

Company might be worth 70 cents.
Stock is selling for 71 cents.