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Friday, March 24, 2006

HQSM update

I'm about to post this info on the HQSM message board on Google Finance:

I looked at HQSM back in October 05 here and here and here.

Admittedly, I didn't look at the actual 10-Q they issued in November here.

I liked a lot of what I saw in the company and I might have been willing to invest back in July at around 15 cents. But there were a lot of red flags and issues:

No provision for doubtful accounts (they had a provision for a related party but not external customers).
Low margin business (the profits mostly come from the Jiahua and not the fish business).
Things in the cash flow statement seemed to be in the wrong categories (acquisition of PP&E was outside of the capex category).
Proceeds from a $100K prommisory note was listed in cash flow from operations rather than cash flow from finance?
Finance produced around $21 million from proceeds from common stock, but it was wiped out [immediately?] by a writedown of goodwill of slightly more.
Provision for doubtful accounts decreased by exactly $2,535,047 in both 2004 AND 2003, if I recall correctly.

I've looked at a lot of Chinese reverse merger companies and I admit that they very often have trouble with accounting, sometimes far worse than what I've listed above. Much of what I saw in HQSM wasn't any different from what I've seen elsewhere. The thing that killed it for me was the number of issues. Like I said, I liked a lot of things about the company and what vaunted12 says matches up with what I interpreted in the statements.

But one problem I had was that based on performance here-and-now (or what I saw in October) the company was worth about 50 cents (if things were to stay about the same). Now I admit that it's very likely they'll grow quite a bit and the value will increase. But I prefer results now over probable results in the future.

Looking right now at the Sept 30 10-Q, I see that Accounts Receivable went up substantially over June. Operations ate up a huge amount of cash due to the increase in AR.

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