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Saturday, April 29, 2006

Auditor denied

Interesting situation at Genex Pharmaceutical. Their auditor, GC Alliance Ltd, resigned because it can't demonstrate to the Office of the Chief Accountant (in time) that it has the requisite knowledge and experience in applying US GAAP, PCAOB Standards, SEC financial reporting rules, and SEC independence requirements. The auditor agrees with Genex's financial statements (as shown in the attached exhibit), but they can't be the auditor because they can't prove themselves worthy to the standards people.

This same thing could affect a lot of the small Chinese reverse-merger companies (Genex is in China). Now the obvious question is (despite what we're being told by Heron) does ETLT have the same issue as Genex? Genex had to get a new auditor, Schwartz Levitsky Feldman, who will be starting all over with the audit process.

ETLT previously appointed Ham Langston and Brezina LLP as the new auditors (replacing Thomas Leger).
Ham, Langston & Brezina (HL&B) is a Houston, Texas certified public accounting firm specializing in audits of public and private companies, corporate and individual income tax compliance, as well as a host of other accounting and financial planning services.
and also this from the firm profile page:
Ham, Langston & Brezina, L.L.P. ("HL&B") is approximately nine years old and was formed when Stan Langston and Rob Brezina acquired Ham & Company, P.C. The focus of the firm is to work closely with management and to strive to continually provide superior service in a timely manner.

Prior to forming HL&B, both Stan and Rob had spent their careers at Coopers & Lybrand, L.L.P. ("C&L") and left as senior managers in C&L's Emerging Business Services Group ("EBS"). The goal of EBS was to provide small, but high growth companies with the resources available from a large international accounting firm. However, upon viewing increasing fee pressures and a related less effective hands-off approach the larger accounting firms were beginning to take toward small to middle market clients, and understanding the inability of these firms to effectively serve such clients, HL&B was formed in order to provide the quality services entities in this market segment deserve. At that point, on a combined basis, Stan and Rob had more than twenty years of public accounting experience [that's not what I'd consider to be a large number].

HL&B is a member of the American Institute of Certified Public Accountants ("AICPA") and the Texas Society of Certified Public Accountants and its Houston Chapter. The firm is also a member of the AICPA's SEC Practice Section, which subjects the firm to very stringent Quality Control Reviews that are monitored by the AICPA. We are continually striving to build a solid reputation for the firm and create a base of reputable public and non-public middle market clients. In the last nine years the firm has experienced a growth in revenues of almost 700% and we expect to continue that trend by providing sound accounting and tax advice and superior service.

HL&B continues to maintain a close relationship with C&L (now known as PricewaterhouseCoopers), as well as other major international accounting firms. Because of the relationships we have developed with these firms, they represent a major referral source for HL&B. We believe in the value of client partnerships, and truly believe that our success is a result of their success.

I'd have to say that it seems extremely unlikely that these auditors will have the same problem given that auditing public and private companies is their specialty. I'd also have to say that since the 10-K is this late, that there are probably issues being resolved (slightly good, net) rather than just rubber stamping the filing.

your name must be mickey cause you're so fine...

Friday, April 28, 2006

Nicholas Financial (NICK) Q4 results

NICK (sec)
Q4 results press release:
Year ending March 31, 2006

Net income was $2.94 million (up 24% from prior year), up 8% from $2.72 million in Q3.

Diluted earnings per share were 28 cents, up from 26 cents in Q3 (and 23 cents for Q4 last year). For the year, diluted earnings per share was $1.01 (vs 80 cents last year).
The Company has reported record increases in revenues, net income and earnings per share every year for the past 16 years.
They opened 7 new branch offices during the year (total of 42). They expect another 6-8 more in the upcoming year.

What's the company worth? Oh, maybe $20. Fears of NICK as a sub-prime lender will continue until there's a major downturn in sub-prime lenders and that will hold the price down, no doubt.

UNRELATED UPDATE: So why is the US military intelligence at USAAISC at Fort Huachuca, AZ looking for "iraqi bank mergers isx"? Something like that is a good litmus test: are you comforted that they're doing their job or are you paranoid that they're doing something evil?

Harbin Electric (HRBN)

HRBN (sec, website) designs, develops, manufactures linear motors and special electric motors. Some patents. Customers are domestic within China. Industry applications for linear motors include oilfield services, conveyor systems, factory automation, packaging equipment, as well as mass transportation systems. Company is based in Harbin, China. 180 employees (15 management, 4 admin, 115 production, 6 sales, 34 R&D, 6 finance).

I had this company on my list of things to follow up on. Too bad I waited so long. This is just a brief look at the company.

They announced 2005 results here.
Reported net income was $10.0 [million] or fully diluted earnings per share of $0.66. Gross margins were 48.9% and operating margins were 42.1%. The Company finished the year with $16.5 million in working capital, of which $5.7 million was in cash. The Company has no long term debt.
Year ends Dec 31, 2005. 16.6 million shares on March 29, 2006. Reverse merger with Torch Executive Services Ltd.

The Chinese government has issued research grants to domestic companies to study specific areas for linear motors, like high speed railroads.

Four types of products offered:
  1. Flat linear asynchronous (self cooled)
  2. Flat 3-phase linear asynchronous (forced ventilation)
  3. "The plane goods transmission installment" (do they mean "plain goods" or plane as in flat surface?)
  4. Micro-motors and armatures for home appliances like microwaves, refrigerators, fans, etc. Armatures for electric drills and other similar tools.
Customer concentration: 3 customers were 69% of revenues: 46%, 12%, 11%.
AR concentration: $5.1 million from these three customers.
The customers are:
GuiYang Putian Wanxiang Logistic Technology
Shanghai Junci Machine and Electric Equipments Company
Suifenghe Wanrong Business Trade Company

Four vendors provided 89% of raw materials: 52%, 16%, 11%, 10%.
In 2004, three vendors were 69% of raw materials.
Dependence on raw materials spot prices (possibly bad right now, but overblown in my opinion).

No legal proceedings.

400K options. 1.1 million possible future options.

AR allowance is only $29K out of $5.8 million. R&D costs are expensed when incurred (not capitalized).

Auditors: Kabani & Company, Inc. of Los Angeles. Unqualified opinion.
Also audited: FDRA, The KingThomason Group, Inc 2002, Advanced Optics Electronics (2004), Peoplenet International (2002), Film and Music Entertainment Inc., Manitoba Health Services Insurance Plan., Datalogic International, Providential Holdings 2002, Elephant Talk Communications 2003, Flexxtech Corporation (interesting 2001), ValCom Inc 2003?, Bodisen Biotech (I've looked at them), Netsol Technologies a 2005 prospectus with doubts about going concern.

Patents were all filed on early 2002 and expire in 2012. They're all utility patents (which is good).
  1. application for conveyor belt equipment with a linear motor.
  2. another conveyor belt with linear motors patent
  3. 3-phase async motor driving linear movement.
R&D costs were $750K in 2005 (that's some serious money in China) and only $38K in 2004.

They claim they have no direct competitors of any meaningful size with the same business model in China. However, they just entered the global markets where competition definitely exists and is larger.

3 officers of the company together own 68.7% of the stock.

Assets are mostly PP&E, AR, and cash. Practically no liabilities and nearly all equity ($24.6 million).

Revenues skyrocketed from $4.9 million in 2004 to $23.6 million in 2005. Gross margins were 48.9% and operating margins were 42.1%, net margins were about the same as operating margins. BUT NO TAXES PAID (temporary tax holiday). Net income is $10 million (comprehensive income is higher, but we'll forget about that for now).

I'm going to assume 17 million totally diluted shares. That would mean net income of 59 cents per totally diluted share.

Question: how are the revenues ramping up each quarter?
Q4 2005: $7.2 million (AR = $5.8 million)
Q3 2005: $7.0 million (AR = $3.9 million)
Q2 2005: $5.3 million (AR = $1.9 million)
Q1 2005: $4.1 million (AR = $0.8 million)

Now, when we look at cash flow, there's almost none from operations and the data above says a lot. Starting with Q1 revenue as a base, each increase in revenues was associated with a larger increase in AR. So the products exchanged for cash hasn't increased, they've merely added a new line of business consisting of products exchanged for promises. Unsurprsingly, that line has done quite well.

Cash provided by operations is extremely low. Meanwhile, they've dumped $2.3 million into capex and $270K of acquisition of intangibles (patents, note 7). In the financing area, they generated $4.8 million by issuing shares.

At this point in time, it's difficult to distinguish whether the majority of their business model is the following or not: 1) sell shares in exchange for cash, 2) exchange cash for stuff, 3) exchange stuff for promises and accounting bonus points.


1. They briefly had a profitless joint venture with Baldor Electric Company which is also primarily owned by the CEO of HRBN (bad).

2. They claim no allowance is needed for the AR (bad). They made $2.7 million in advances to suppliers. Depreciation schedule is a bit on the long side. $111K in advertising costs.

HRBN is exempted from income tax until June 30, 2006.

3. Inventories are almost all finished goods.

4. PP&E is only about 5% depreciated.

Tianfu Yang, CEO, Chairman: Since January 24, 2005, Tianfu Yang, age 44, has been Chairman of the Board and Chief Executive Officer of Harbin Electric. From May 2003 until present, Mr Yang has been Chairman of the Board and CEO of Harbin Tech Full Electric Co., Ltd. From 2000 until present, Mr. Yang has served as Chairman of the Board and CEO of Harbin Tech Full Industry Co., Ltd. From 1994 to 2000, he was President of Harbin Tianheng Wood Industry Manufacture Co., Ltd. From 1991 to 1994, Mr. Yang was President of Hong Kong Lianfa Real Estate Company. From 1988 to 1991, he was President of Hong Kong Property Management Development. From 1986-1988, he was President of Helongjiang Cultural Development Company and Guangzhou Subsidiary Company. Mr. Yang graduated from Zhejiang University with a Masters degree in Electric Motor Automation and Control [having seen a bit of motor related control theory, I consider that a good education to have]. From 1978 to 1979, he was a professional member in the Heilongjiang Province Aeromodelling Team, twice becoming free-style aeromodelling champion in national competition. Mr. Yang is currently the commissioner of the China Electro-Technical Society (CES) in the Linear Motor and Electromagnetism Eradiation Specialist Committees. Mr. Yang is also the People’s Representative of the City of Harbin. In other words, he represents about 10 million people as a government official and in a pretty powerful industrial city way up in Manchuria. Considering that he's a major big-wig, it's worth noting that the risk factors actually mention corruption as a big risk. I consider this mention as being slightly good on the good-bad scale.
We may face political and/or judicial corruption in the PRC.
Another obstacle to foreign investment is corruption. There is no assurance that we will be able to obtain recourse, if desired, through the PRC’s poorly developed and often corrupt judicial systems. Most of our assets are located in China, any dividends of proceeds from liquidation is subject to the approval of the relevant Chinese government agencies
Tianfu Yang owns 58.7% of the company (How did he acquire it? considering it's worth roughly $80 million). All other executives and directors own less than 4%.

Conclusion: I'm not buying it, although the company could end up doing very well over time.

Tuesday, April 25, 2006

Revisiting companies 13

revisiting companies 1
revisiting companies 2
revisiting companies 3
revisiting companies 4
revisiting companies 5
revisiting companies 6
revisiting companies 7
revisiting companies 8
revisiting companies 9
revisiting companies 10
revisiting companies 11
revisiting companies 12

IDIB (sec, website) Stock plummetted to 5 cents due to a very recent announcement of a Chapter 11 bankruptcy for itself and two subsidiaries. Internet Development Inc, IDI Technology Inc, Sports Media International Inc, and Worldwide Recruiting Solutions Inc are not in Chapter 11. However, since the overall company is going into Chapter 11, I would expect that any economic benefits from those subsidaries are controlled by the court (don't know for sure, however). The problem is a large uncollectable receivable from New Connexions ($1.1 million) and huge write-down for impaired goodwill ($1.5 million on Sports Media International, $1.8 million on HG Marketing as well as Mentoring of America, $1.3 million on Chief Financial, plus other smaller writedowns). Total goodwill impairment is $4.8 million.

HG Marketing as well as Mentoring of America started a lawsuit against IDIB. IDIB says the allegations have caused substantial damages, including the loss of hundreds of thousands of dollars in net operating income that have been allegedly misappropriated and diverted from the call center they're apparently supposed to be supported.

A big shareholder, HG Marketing, Inc, was selling 6.9 million shares in an offering. They accepted the shares in Jan 2005 as payment for some of HG Marketing's assets.
The material components of the purchase price for the assets were (i) the assumption of certain liabilities of the sales and marketing operation; (ii) $1,800,000 in cash; (iii) warrants to purchase up to 2,500,000 shares of IDI Global's common stock which become exercisable between 2008 and 2012 at exercise prices escalating annually from $0.80 to $1.80.; and (iv) 4,356,436 shares of restricted IDI Global common stock which shares shall be released to the sellers based upon the performance of the sales and marketing operation over the first two years of operations.
IDIB apparently guaranteed $150K/month operating profit for the first two years. It looks like the assets were sales leads and such.

In this latest transaction, the share count increases by 2.5 million shares to 26.3 million shares. I don't really get it because the net operating income for the first 9 months of 2005 are below the target based on the Q3 results.

The 10-K is out now (it was late). But considering the issues going on with this company, it's totally out of my circle of competence.
stop following

MHJ (sec) Man Sang Holdings. Freshwater and cultured pearls. Distribution. They earned about 38 cents in 2005. See the main post. Stock is up to $5.70 (it made a huge jump just after I last looked at it).

100K preferred shares have voting rights of 3.2 million common shares.
Mr. Cheng Chung Hing, Ricky, CEO and Chairman of MHJ has shared dispositive power over 3.4 million shares, which is 53.9% of the common stock. I'm not sure I understand this, but later on Dec 23, 2005, he acquired 9.589% of the total shares of MHJ.

An independent, non-executive director and Chairman of the audit committee resigned on Jan 13, 2006. Replaced by Mr. Wong Gee Hang, Henry.

Q3 Results ending Dec 31, 2005:
6.4 million shares on Valentine's Day 2006. I don't know the options outstanding.

Huge amount of cash (slightly more than prior quarter). Current ratio is 10. Large net cash, but also huge minority interests, almost 1/3 of assets and nearly 100% of equity!

Revenues are down slightly from prior year and prior quarter. Low margins. Operating margin is around 5%. Minority interests claim over half the profits. Net income (which is nearly 1/3 interest income from the cash) is US$322K for the quarter.

9 month cash flow from operations is actually lousy. If you back out the minority interests, you get cash flow from ops of about $1 million (vs income of $1.44 million). AR and inventories increased. Capex matches depreciation. They issued stock for $763K.

The biggest buyers of their pearls are in the US and Germany. One 16% customer, one 13% customer, one 11% customer.

The drop in revenues is due to a drop in high-priced South Sea pearls to the US due to an increase in precious metal prices (which results in less jewelry being sold). But that could evenually mean more pearls and less metal. Europe is picking up some of the slack. Bad debt provisions were lowered. Higher interest rates add to profits due to the large cash position.

Seems like about 20 cents of free cash flow per share. Solid balance sheet. Industry dynamics are interesting. The stock might be worth $3.00. The stuff below is what appears to be a new joint venture into PRC.

Subsequent stuff: A very strange 8-K where they bought 1 share of Smartest Man Holdings Limited, which is the sole share of stock, for US$7.31. Yep, seven dollars and thirty-one cents. The sole asset of this company is its 49% legal and beneficial interest in China Pearls and Jewellery [sic] City Holdings Ltd., which entered into an Establishment Contract with Zhuji City Shanxizhu Town Government and Zhuji Municipal Government (supervising party) to establish a wholely foreign-owned enterprise. Man Sang will contribute US$14.7 million into the company. The enterprise was formed with US$20 million registered capital and a US$40 million total investment. So Man Sang bought a 49% interest in this existing jewelry retailer(?) and Man Sang is putting up around US20 million in capital to match what is presumably worth another US$20 million. How do I know their part is worth US$20? Color me skeptical.

Another half million shares for options.

MLR (sec) Miller Industries (covered here earlier). This was the Chattanooga area based manufacturer of vehicle towing and recovery equipment. Seems like a good company in a potentially bad competitive situation. The stock is up to $26. Their 10-K is out, but it's been amended already to change fix amendments 31.1, 31.2, and 31.4.

2005 results:
11.3 million shares on March 10, 2006. 321K options outstanding. Assume 12 million totally diluted shares.
Balance sheet is fairly strong, but AR and inventories are up (they're by far the biggest assets). About half equity. Not much debt (fairly good interest rates).

Revenues are up 48% over prior year (which was up 15% from the year before that, which was down about the same dollar amount from they year before that, which itself was down again from 2001). Operating margins are really bad: 5.3%. And that's far better than the prior year. Share count has grown quite a bit in the last few years in debt for equity swaps and private issue in 2004. Earnings are $1.55 per totally diluted share.

Cash flow from ops is fairly weak due to large increase in AR (and smaller increase in inventories). Discontinued operations chewed up some cash. Ignoring the discontinued operations, free cash flow was around $13 million vs $18.6 million in earnings.

The stock is probably worth around $22.

HOOB (sec) Tiny business leasing out Paramus, NJ buildings to Sports Authority and CompUSA. Stock is down to $36 (I had figured it was worth around $28 plus the excess long-term value of the land).

Q1 results:
Balance sheet cash is way up, but "trading assets" (yikes) are down for a net increase of about $200K. Revenues are exactly flat (as expected). They had some trading gains (still yikes). Rental expenses are up somewhat, but SG&A is down by more. Net income is $95K but I'll back out about $30K of that as non-recurring trading gains. 270K shares on 2/9/06. Unknown dilution, but probably not much. That's about 24 cents per share for Q1.

Looking at cash flow, large amounts of money are being traded in some sort of market. Cash flow is all over the map, but looks ok. They only gained $15K in trading for the full year 2005 (it wasn't a loss). They've been paying down mortgage principal every year.

Looking back at the years 1999-2003 (page 14 here), they've never lost money in those years and the worst earnings were 58 cents. Average was about 70 cents. They dumped that medical business and lost some money on that, but overall they did fine.

HYDI (sec) Hydromer polymer R&D for medical, commercial, cosmetics, veterinary. Stock is around $1.30. They successfully defended their cow teat dip patent (yes, you read that correctly). $150K judgement.

Q2 results:
Balance sheet cash is down. AR down. Balance sheet still strong. Assets are half PP&E, half current (inventory, AR, cash). Huge mortgage payable liability. Half equity.

Revenues are down 13.7%. A patent expired and royalties disappeared (they reached new agreements with all 4 licensees and revenues will be back up to nearly the prior level, I can't figure out why; "supply and availability agreements"). Gross margins are down slightly due to product mix. There's a benefit from income taxes. Net loss of 3 cents vs profit of 1 cent. A lot of this loss is due to R&D investment being made.

4.6 million shares on New Year's Eve. 523K options outstanding on June 30, 2005 (Note 10 in 10-K). 5 million fully diluted shares.

Cash flow is even worse due to deferred income tax, AP decrease, and some minor stuff. Capex is a bit lower than depreciation. Big purchase of short term U.S. Treasury bills. Paid off some long term debt. That's why they burned off some cash. They're certainly acting like the loss is a temporary blip.

Historically, they earn 3-5 cents per share. Cash flow lately has looked good, but was crappy in 2002-2003. A lot of that was the same kind of investment as the R&D lately. So based on what I see (I haven't looked at them closely like most of these companies being followed), I'd guess they might be worth $1.00.

DYSL (sec) Dynasil. Optical components for lasers, analytical devices, semicondutor devices (photomasks, microwave), spacecraft, aircraft, energy. But this stuff is via a recent acquisition. Stock is around 88 cents.

Q1 Results:
3.8 million shares on Feb 10... 2005!?!?! Oops, they screwed up, should be 2006. Balance sheet cash is down from year end, AR down, inventories up slightly, net PP&E down slightly, bank line down, AP down, long term debt down slightly, equity up very slightly.

Revenues are up nearly double (acquisition of the optical business stuff). Gross margins 31% (vs 26% prior year). SG&A way the hell up: Operating margin is only 3.3%! And interest ate up a big chunk of that. Only $25K of net income on $1.55 million in revenue which grew from $781K revenue. Profit would have been twice that, but they screwed up a fused silica order.

Free cash flow is better, but still crappy overall. They paid down some debt.

Ok, the real comparison would be to, say, Q3 of last year. Revenues were $1.6 million (higher than Q1 of this year). Gross margin was slightly better than Q1 at 31.8%. SG&A was slightly better than Q1. Operating margin was 5%. Net income was $50K. So without the fused silica screw-up, Q1 would look a lot like Q3 of last year. Cash flow stunk in Q3. They paid $700K in cash for the acquisition (plus $178K in stock, but they assumed $529 million in liabilities). They might have been better off putting the $700K in bonds.
stop following

DWVS (sec) point-of-sale activation of "high shrinkage" (aka often stolen) products like cash cards, phone cards, prepaid wireless time. Most of their business is up in Canada, eh. 54 million shares on Feb 17, 2006. 3 million options (see Q3 link). Fully diluted shares are 57 million.

Q3 results:
Cash is up. AR is up. Inventories are way up (mostly PINs and cellular phone time). Assets are mostly AR, inventories and cash, with some goodwill and machinery (vending equipment, POS equipment) thrown in. Current ratio is just over 1. Not much equity.

Revenues climbing. Gross margins are 33% (down a couple of percent). Operating margins are 5.0% (up from 4.7%). G&A was 13% (up from 11.5%). Sales and Mar was 5.3% down from 8.3%. $394K net income (up only slightly from $381K). 0.67 CENTS per fully diluted share.

Cash flow from ops was great due to huge increase in AP (mostly PINs and cellular phone time) offset partially by increase in inventories. Capex was about half of depreciation. Very little financing.

10 largest customers were 68% of revenues (up from 60%). Single customers: 19% and 11% (vs 17% and 10%).

Why do I get this feeling like the market for this stuff could disappear 5 years down the road? Well, keep following for now.

Saturday, April 22, 2006

Some companies from the past: NICK, MEOH, CTAS, KEM, SJM, AAON, GWR

A list of some of the companies I've followed in the past. I'll probably post other sets of these later on.

NICK (sec) sub-prime auto lender. I made good money on it. I still follow it. I think it's still a reasonable investment. They do a very good job of tracking loans in static pools. The CEO/founder was an engineer who just sort of stumbled into that industry and he applies the rigorous methods of engineering. The only CEO I know who posts messages on their own company's Yahoo message board. Like so many companies I looked at, this was a VIC writeup (so were some of the ones below).

The net interest rate spread they get is over 20%. The provisions are very high and routinely, when the static pools drain below a certain point, a lot of those reserves pour back into earnings. The company is run in batten-down mode preparing for downturns.

MEOH (website) world's largest methanol producer (at least they were when I owned them). Canadian. They reached close enough to full value for me in, I think it was early 2005. However, the price of methanol keeps going up and the company is very well run. 2005 results. A good place to park money outside of the US dollar.

CTAS (sec) uniforms. Not cheap, but strong balance sheet, not bad cash flow.

KEM (sec) tantalum capacitors and other passive electronic parts. Also VSH and AVX. It's one of those cyclical companies you buy when everyone thinks the sky is falling. I haven't followed them in years. The problem is that they're very capital intensive and they have low margins. This is another one of those supply/demand scenarios... and it hasn't worked out as I expected. I don't know, China could probably kill them. Maybe that's their problem nowadays.

SJM (sec) Smuckers. I briefly owned them years ago. It was $18 a share. I always thought they weren't run all that well. Solid brand, mediocre management. Latest quarter results show they're capital intensive, probably a serial acquirer (although some of those might be good acquisitions). The point is, everything they buy simply dilutes their one solid brand. I remember when they bought the natural peanut butter company and the synergy of peanut butter and jelly was just too funny. Free cash flow is weak. I don't think I'd be interested in them in the future.

AAON (sec) quality industrial air conditioners. I correctly sold them in 2002 at full price. Their 10-K came out last month. Wal*Mart is still their biggest customer, but they're now down to less than 10% of total sales (from 14% in 2004 and 18% in 2003). Wal*Mart likes them because the total cost of ownership is supposedly lower than Trane: the units are more expensive but last longer, from what I heard. Trouble is, AAON is dependent on copper and aluminum raw materials and could get squeezed if prices go up a lot: they're on the wrong side of the commodities equation. Revenues have been climbing, but gross profits are flat (they're going back up, fortunately) and SG&A is climbing. They expanded into Canada. Very strong balance sheet. Steady share count (very few options). But free cash flow stinks due to continuously expanding AR and inventories and high capex. If these guys get slammed by a downturn with skyrocketing commodity prices, it might be worth looking at again.

GWR (sec) Genesee and Wyoming: short line railroads. They were buying up small freight short lines years ago and now have railroads in US, Canada, Mexico, Australia, and Bolivia. 10-K for 2005: They're selling their Western Australia operations for US$956 million. It looks like they paid US$334 million for it in 2000. They want to buy up contiguous or nearby railroads to what they already have.

Revenues and traffic are up in just about every category in every region. Carloads are up, revenue per carload is up. Australian carloads are down, but revenues are up on each line. They acquired a lot of lines in 2005 (see table on page 23).

Overall Revenue
2001: $174 million
2002: $210 million
2003: $245 million
2004: $304 million
2005: $385 million (growth due to both acquisitions and organic growth)

Net income per diluted share:
2001: $0.72
2002: $0.71
2003: $0.77 ($0.68 per diluted share)
2004: $1.03 ($0.90 per diluted share)
2005: $1.36 ($1.20 per diluted share)

The total debt jumped up quite a bit in 2005 (presumably due to acquisitions).

I really like the way they break down the results to make it easier to understand what's going on in the business. I liked the management when I looked at them years ago. Dilution from options etc. isn't much historically.

Balance sheet: Total assets grew to $981 million from $677 million. That's a huge increase and should make shareholders consider the various issues associated with rapid growth. Most of the increase went into PP&E, as expected. Debt increased quite a bit as well. The debt to equity ratio is a bit less than 1.

Income statement: operating margin is 18.4% (up from 16.4%). Interest expense as a percentage of operating income actually dropped to 21% vs 22% in 2004.

Cash flow from operations is good, but capex is consistently larger than depreciation. Cash flow from ops is lower due to having much of the earnings as unconsolidated international affiliates (which I would view as just fine without more details). AR has been increasing lately, but so has AP. Acquisitions dwarf operations in terms of cash moving around. They borrowed a net $200 million in 2005, but not in prior years.

So GWR is expanding by raising their debt level, plus whatever funds come from operations. When I looked at them before, I was ok with their expansion strategy. So what are they worth? Maybe $25? It's selling for $36.21, so I'm not interested now. A downturn might be tough for them. Long term economic expansion would be very good, and that's the thing here. My long term view of the global economy is quite bullish. Short term, I have no idea. If we do have a down turn, this would be the type of company I'd want to scoop up cheap for something like $10.

UPDATE 4/23/06: I updated the revisiting companies 12 post with the GACF 10-K.

Tuesday, April 18, 2006

Waiting for ETLT's 10-K

link to ETLT's website news section.
link to ETLT's SEC filings.
link to Yahoo News for ETLT. (moved to here, see UPDATE below)
link to Pink Sheets news for ETLT. (moved to here, see UPDATE below)
link to Google news searching for ETLT.

UPDATE: (and yet another hat tip to Pat)
Well, Heron Public Relations Group says the following:
The auditor for the 2005 year (including E-Sea) was already done back in March. However, the 2004 year results need to be amended due to FASB 133. The calculations are done and Thomas Ledger Co. (the auditors for 2005) are reviewing the results. It could take several days. When Ledger is done reviewing, then the 10-K gets issued, hopefully very soon.

UPDATE 4/21/06:
ETLT now has an "E" at the end of the ticker symbol since they're officially late with the 10-K: ETLTE. The "E" will go away not long after it's filed.

UPDATE 4/25/06:
A little bird whispered in my ear and said, "CHIRP CHIRP!!" No, according to unnamed sources named Pat, apparently the 10-K should be out within a couple of days from today (meaning Thursday or knowing how these things go, Friday).

UPDATE 4/28/06:
As far as I know, EDGAR doesn't post anything after 6:00 PM and it's after 6:00 now. So it looks like we won't see a 10-K until... Monday? Later? I have no idea.

UPDATE 4/29/06:
I posted auditor denied wondering if the same problem happened to ETLT. Seems very unlikely.

UPDATE: 5/2/06:
Well, Pat keeps bugging Heron and they keep coming back with more delays. This time it's almost ready and expected to be filed in several days. I suspect there are issues being hammered out between the new auditors and ETLT. Hell, they might as well tack the Q1 results onto it.

UPDATE: 5/8/06:
Once again, Pat has the latest from Heron who claims it's this week....

UPDATE: 5/15/06:
I liked ETLT at 47 cents, and I like it even more at 38 cents.

UPDATE: 5/16/06:
Pat tells me that Heron is saying Thursday. But of course.

UPDATE: 5/19/06:
It's here

Monday, April 17, 2006

Strathmore Minerals (STHJF) Canadian Press Release

hat tip to Pat on this one

Strathmore Minerals (STM.V, STHJF) issued something that is apparently not for distribution in the USA (which is the opposite of this). So I'll refrain from distributing it here and just point to it up there in Canada.

Apparently up there in Canada they priced their "flow-through" common share based financing at C$3.30 per share to raise C$6.1 million and their regular common share based financing at C$2.55 to raise C$3.5 million (which includes half a warrant priced at C$3.25 and expires in 18 months). There's some sort of oversubscription for up to another C$574K on the regular common share based financing. The financing was led by National Bank Financial Inc. and including Raymond James Ltd. and Canaccord Adams. The offering closes April 27, 2006.

The money will fund the Athabasca Basic development work and permitting on the US properties as well as for "general corporate purposes" (which could possibly mean a new gumball machine in the lobby).

Ok so that is, what, 4.2 million shares? (6.1/3.3) + 1.5*(3.5/2.55) + 1.5*(.574/2.55)

In my estimate of the value of Strathmore, I assumed a lot of dilution (70 million shares vs the 49.2 million outstanding at the end of Q1 2006 plus another 17.4 million options and warrants). So maybe it's time to bump that totally diluted share count up to say 100 million shares.

Wednesday, April 12, 2006

China Expert Technology (CXTI) Wins Next Phases

CXTI issued this press release today. They won two more contracts for the Dehua project, phase 3 and 4. If you look at the table on the 2005 10-K, you see phase 1 and 2.

Phase 1 started April 2004 and ends August 2006. The total phase 1 contract is $15.6 million.

Phase 2 started January 2005 and ended November 2005. The total phase 2 contract is $11.8 million.

Phase 3 is for $10 million and it started in Jan 2006 and finishes June 2007.

Phase 4 is for $12 million and started in March 2006 and finishes in December.

We can see from the 2005 10-K chart that CXTI had recognized about half of the revenue for phase 3 of the Jinjiang project, so they have experience with doing the work.

The Shishi contract shows the various phases of what I assume is a similar project.

Phase 1 is the security platform, application platform, unified admin approval, portal website, coordinated office system, geography information system, and emergency commending system.

Phase 2 is the auxiliary decision system, social medical security info system, and one card communication system.

Phase 3 is the information resource library and e-commerce system.

I don't think it had a phase 4. The dollar amounts of Shishi seem to match Dehua reasonably well.

With around 1.2 billion people, give or take the population of the US, and a lot of government control, it seems to me that China needs a great deal of this kind of IT system work done. My advice to CXTI would be to think of itself as a training company as much as a systems integration company. Much of their competitive skills will be in training a lot of people how to do these projects.

But these two phases should add about $18 million in revenue to 2005 and maybe $3 million in net income (or about 6 more cents per fully diluted share for the year). I'm thinking they might need to raise more cash to fund these projects, unfortunately.

UPDATE 11:43 AM, 4/15/06: Welcome people from TheStreet.Com.

Tuesday, April 11, 2006

Short Interest Reporting Begins July 3

According to Pink Sheets and this official notice from NASD, short interest reporting for companies will be extended to over-the-counter stocks on July 3, 2006. It will be interesting to see the short interest on all these stocks I've been looking at.

UPDATE: It's here.

Sunday, April 09, 2006

Revisiting companies 12

revisiting companies 1
revisiting companies 2
revisiting companies 3
revisiting companies 4
revisiting companies 5
revisiting companies 6
revisiting companies 7
revisiting companies 8
revisiting companies 9
revisiting companies 10
revisiting companies 11

FAME (sec website) Flame-retardant coatings and sealants. Flamemaster. They went dark (last results Q1 2005). Website has results. Stock is selling at $5.15.

Q1 2006 (ending Dec 31, 2005): revenues up 27.5%. 10% net margin (vs 3.5%). Net income was 12 cents (vs 4 cents). Higher labor costs. Higher raw material costs. Lower regulatory reporting costs (from going dark). There's no balance sheet info, no cash flow statement, no notes, no nothing.

The last audited financial statement was their amended 10-K for the year ending Sept 30, 2004. The balance sheet was ridiculously solid (net cash of $1.79 million with total assets of $4.3 million). Cash flow from ops matched or exceeded earnings. Very low capex and depreciation. Directors and officers own 27.7% of the stock, but management has control (for now) of 45%.

Full year ending Sept 30, 2005: revenues up 6.6%. Earnings 51 cents diluted (vs 43 cents). In April 2006 they announced a 3.4 cent dividend (65th consecutive quarterly dividend).

Stock is not selling cheap enough, and disclosure is extremely limited. Continue following, but I'm wondering if I'll ever be able to invest in this.

GACF (sec) Airplane repair business. Stock is at $1.70 They're late in filing their 10-K: new auditor and a new 30% owned subsidiary.

Ok, they filed their 10-K a day later and I didn't get around to seeing it until 4/23/06.

10-K: 38.7 million shares on 3/22/06. 1.3 million options. 40 million fully diluted shares. Comparing to prior 10-K. Employee count jumped to 173+27 (from 150+20). Customer concentration is down (but still significant). Single location concentration is down to 73% (from 97%).

New lawsuit initiated against a customer for non-payment ($185K), will probably be settled. Former independent contractor Mr. Tarus Woodall filed a sexual harassment (I'm picturing in my mind... "Dude, stop being such a dick and do you damn job") and religious discrimination (his religion was allegedly mocked... wait, it's coming to me... "and shut up already about Scientology/Islam/Baptists, just do your damn job") suit against the HAT subsidiary. HAT says he was late a lot of the time and had job performance issues.

81 shareholders of record, up from 57 last year.

The HAT subsidiary purchased the inventory held on consignment belonging to Jetran International. plus a DC9-82 for $2.9 million. They say this should result in $10 to $15 million of revenue (hopefully with good margins!). This was paid for in part by 7.2 million shares issued when Barron Partners exercised stock options.

New 5-year contract with the Mexican airline Avolar. 30 aircraft fleet growing by about 1 aircraft per month through 2008.

New joint venture, Jetglobal. Acquire a fleet of 26 Boeing 737-200 jets from Jetran. Global's share of the 2005 net income was $1.1 million in 2005.

New credit line finalized. $5 million and also $7 million for acquiring aircraft. Interest rate reduced from LIBOR+3.5 to LIBOR+3 (which is still somewhat crappy, but not for these garbage pail companies).

New director added (accountant independent), none disappeared. Executives and directors own 11.38% of the stock, down from 17.7% (due to dilution). Barron Partners owns fewer shares now.

Balance sheet: AR is up slightly. Inventory way more than doubled when you include non-current inventory (see purchase above). Huge $6.3 million jump in the joint venture asset. Total assets more than doubled. AP is way up. Current ratio dropped to about 1.3. About $4 million additional paid-in capital. $3 million increase in retained earnings.

Income statement: Revenues are up over 33%. 5.8% operating margins (up from 4.3%). Net income includes equity in income of unconsolidated affiliate of $1.1 million (see joint venture above). Net income is $3.1 million, 7.75 cents per fully diluted share.

Huge amount of dilution in the last few years. 7.2 million shares to Barron Partners at 68 cents per share (options). Around 12 million in 2004 at prices in the range 34 cents to 52 cents.

Cash flow from operations in negative for two years in a row. Half of 2004's income was gain from renegotiating a contract.. Huge increases in AR and inventory (part of the inventory increase is known and expected). Capex is above depreciation. Issuing stock paid for all this, plus some net bank loans.

I'd say the stock is worth about $1.00.

DAAT (sec) Gun cleaning and safety equipment business. Stock is around $2.20 (at least fully priced, maybe overvalued).

10-K: 6.3 million shares on Mar 27, 2006. No stock options. Inventories are up. AR is up. PP&E is up. Factored a big chunk of receivables each year. Very strong balance sheet. $5.5 million in assets.

Revenues up 43% to $13 million. Gross margins 35% (down from 37%). Selling costs up 50%. Operating margins 16.4%. Net margin 8.8%. Earned 18.7 cents per fully diluted share.

Cash flow from ops is only 10% of earnings due to inventories, AR, AP. Free cash flow is pretty much zero. Prior year was far worse due to factoring receivables, inventories, and AR.

Bad vibes.

DEWY (sec) Dewey Electronics. Two segments: 1) military systems, 2) ski resort snowmaking equipment. "There are no intersegment sales." Stock is around $4.25.

This is a hardscrabble business.

Q2 ending Dec 31, 2005: 1.4 million shares on Feb 10, 2006. Balance sheet is strong, mostly equity. Revenues up, gross profits down. SG&A up. Operating loss. Net loss. Negative cash flow from operations.
Stop following

DFNS (sec) Body armor, car armor, etc. There were issues with Zylon based bullet proof vests that would probably benefit DFNS. Stock is down to 29 cents.
Revenues:          2005     2004
Civilian $907K $655K
Israeli military $580K $359K
Export military $505K $2,167K
The export military revenues going forward are difficult to predict. Gross margins are likely to drop even more due to raw material costs going up.

They're late in filing their 10-K. No real reason given. But they amended that late filing.
The Registrant expects to report that its net revenues for the year ended December 31, 2005 decreased to approximately $11,450,000 from $12,036,404 in the year ended December 31, 2004, a decrease of 4.9%. The Registrant believes that it will report a net loss of approximately $26,000 for the year ended December 31, 2005 as compared to net income of $381,169 for the year ended December 31, 2004.
I guess we wait and see.

DSCI (sec) Bandages, wound closure, fasteners, skin care. They had blatantly accelerated the vesting of their options. Stock is at about 84 cents.

10-K: 12.3 million shares of stock on Feb 28, 2006. Strong balance sheet, mostly equity. $10.6 million of assets. Revenues up 18% to $23.5 million. Gross margin 29% (vs 26%). Big goodwill impairment of $911K. Without impairment, they would be at break even. Prior year was a huge loss. Large provision added for bad debts and rebates. Increased provision for obsolete inventory. Seems like they're cleaning up. $3 million in cash flow from ops. Capex of $224K is about half of depreciation. They paid down a bank line of credit by $1.7 million. Also paid down some debts. Issued stock for $522K. Maybe $2.7 million in free cash flow, maybe $1.5 million is for real (that's a wild guess, mind you).

About half of the growth in revenues was due to a one-time benefit related to the sale of inventory on hand to fill the pipeline. US sales dropped by 1.9% due to the loss of a catheter fasterner exclusive and skin care competitive forces, partially offset by continued growth of private label business, stabilization of Dermagran business.

I'm thinking the improvement last year will be at least partially reversed, so the stock isn't really worth as much as it might seem from free cash flow.

The Rose and the Onion

One day a young woman had a single longstem red rose. She place it in water and waited patiently for it to bloom. To hold the rose properly in place, she placed an onion in the neck of the vase. Days later, the rose simply wilted and never bloomed while the onion sprouted long green shoots.

Between the beautiful rose and the smelly onion, it's the onion that's alive.

I hereby place this 5 sentence story into the public domain.

Saturday, April 08, 2006

SXR Uranium One Inc. (SXRFF)

SXRFF, website

2005 annual report
2004 annual report
Q3 05 report
Q2 05 report
Q1 05 report

Feb 27, 2006 presentation

The 2005 annual report is from their website.

The annual report is presented as of 3/28/06.
Full year ending Dec 31, 2005.
Incorporated in Canada.
Uranium operations are in South Africa, Australia, and Canada
Gold operations are in South Africa

Reverse merger by way of Aflease Gold and Uranium Resources Limited. Scheme of arrangement under the Companies Act, 1973 (South Africa). Finalized Dec 8, 2005. Souther Cross Resources, Inc. changed name to SXR Uranium One Inc.

Southern Cross operations are included as of Dec 8, 2005. The Dec 31, 2005 balance sheet represents the final company. Comparative info is for Aflease. Shares of SXR Uranium One are traded on the Toronto Stock Exchange and the JSE Ltd (Johannesburg) stock exchange.

Uranium One's principal assets are
Uranium One will sell (at book value, receiving at least 20% of the purchase price within 3 years of the first venture profit payout, with 20% paid during each 3-year period after that) a 26% interest in the Dominion Uranium Project and Bonanza Gold Project (all the South Africa operations) to its black economic empowerment joint venture partner, Micawber 397 Ltd. Aflease (Uranium One?) will manage the joint venture operations. (OPINION: It would be much more effective and dignified to have Uranium One to take the same amount of money and send a qualified large group of black kids to mining college and allow them to do meaningful internships within the company).
The Micawber transaction will be accounted for when the risks and rewards of the transaction are deemed to have passed to Micawber.
Seems like it's a huge liability right now. Why wait?

Skipping ahead, looks like they have about 13 million warrants and options and 71 million shares on Dec 31, 2005. So let's assume 90 million totally diluted shares on Dec 31, 2005.

They raised C$170 million in Q1 2006 by issuing 22.3 million shares. So I'll bump my totally diluted share estimate to 110 million shares.

The shares (SXFF on "other OTC") are trading at about US$8.50 per share. I don't want to pay more than $10 per pound in the ground of uranium (i.e. 93.5 million pounds of uranium after accounting for the effects of the joint venture), preferrably something like $1 (i.e. 935 million pounds of uranium after accounting for the JV).

Honeymoon has indicated resources of 9 million pounds.
Dominion now has been increased 65% to 16.1 million pounds of indicated uranium resources, 146.6 million pounds of inferred resources, but with the joint venture we can only count 11.9 million pounds indicated resource and 110 million pounds inferred resource. They plan to mine 2 million pounds per year starting in 2007 and ramp up to 4 million pounds per year in 2011.
They have some exploration in Australia.
They have a joint venture in the Athabasca Basin of Canada. No resources or reserves determined yet.

- S T O P -

Misc stuff below just to keep the notes somewhere:

From the Q3 2005 financial statements:
New board:
Neal Froneman (CEO)
Jean Nortier (CFO)
Andrew Adams (non-executive Chairman)
Mark Wheatley
Terry MacGibbon
Ken Williamson
Terry Rosenberg
John Sibley


ML 6109 + MPL 15 + MPL 64, "Honeymoon", 5.8 sq miles, 100% owned
EL2937, "Yarramba", 175 sq miles, 100% owned
EL 2958, "Goulds Dam", 129 sq miles, 100% owned
EL 2978, "Katchiwilleroo", 252 sq miles, 100% owned
EL 3017, "South Eagle", 144 sq miles, 100% owned
EL 2896, "Ethiudna", 300 sq miles, Equinox Joint Venture

EL 3214, "Karkarook", 35 sq miles, Oliver Joint Venture
EL 3397, "Yeltacowie", 235 sq miles, 100% owned
EL 3398, "Hesso", 323 sq miles, 100% owned
EL 3399, "Charlinga", 358 sq miles, 100% owned
EL 3400, "Bowen Hill", 233 sq miles, 100% owned
EL 3415, "Kangaroo Bluff", 282 sq miles, 100% owned
ELA 84/05, "Mt Wedge", 271 sq miles, 100% owned
ELA 260/05, "Kielpa", 34 sq miles, 100% owned

First phase of Goulds Dam Project exploration finished. Airborne electro-magnetic (AEM) and gravity surveying. Also, 84 rotary mud holes (about 7 miles) drilled on three exploration licenses.

Geological survey coverage of Ethiudna is poor. No AEM, only a widely spaced gravity survey. Since drilling equipment was in the region, they did some drilling. The 9 holes on the southern traverse was good, one showed what sounds like fairly good ISL qualities. Needs follow-up surveys and more closely spaced drilling. New discovery.

Resource Capital Fund L.P. and Resource Capital Fund II L.P. owns 16% of the stock.


Maybe they have 100 million pounds of extractable U3O8. That would make the stock cost about $9.35 per pound in the ground based on the current stock price and my estimate of totally diluted shares (Strathmore is closer to $1 or even less). There are political issues as well. In terms of using this as a means to diversify my uranium investment, I fear that with SXR I'd be giving up a lot of the long tail upside that I get with Strathmore, I still get the same risks if uranium prices were to drop, plus there are some extra risks. Maybe I'd look more closely at SXR at $4 per pound.

Yes, I read on VIC that Strathmore has screwed up at least somewhat (not being able to get drilling done due to a long backlog). And given how uranium keeps going up, it would be nice to be able to diversify within uranium stocks. The thing I like about Strathmore is that they have a lot of properties with a lot of drilling done and, although most of it hasn't gone through NI 43-101 compliance in the statements [yet], it's fairly clear that they do have a whole lot of uranium. So my estimate of the chances of Strathmore being a poor investment in the case that uranium prices don't drop is extremely low. It's fairly easy to do the NI 43-101 work and then sell the properties one-by-one. Simple.

Friday, April 07, 2006

China Expert Technology (CXTI) Shishi City Contract

CXTI filed an 8-K with the SEC with the Shishi City E-Government Planning, Design, and Construction contract.

The two signing parties are Shishi City Information Management Co. Ltd. (which was appointed by government) and CXTI. Signed on March 30, 2006.

Shishi was assisted by a consultant, Fujian International Consultants Ltd.


CXTI is doing the entire planning, feasibility analysis, system design, and construction.

Project Planning, Feasibility Analysis, Training for e-government. There are 13 construction items:
  1. Hardware Platform
  2. Security Platform
  3. Application Platform
  4. E-Government Portal Website
  5. Unified Administration Approval System
  6. Coordinated Office System
  7. Information Resource Library
  8. Geography Information System
  9. Decision Support System
  10. Emergency Commanding System
  11. Social Medical Security Information System
  12. One Card Communication System
  13. E-Commerce System
CXTI is responsible for purchase, installation, integration, testing, maintenance, development and training, materials and appliances relevant to the construction items above (hardware and software). The hardware platform will "be bought be [CXTI] on [Shishi]'s behalf." CXTI must also do all preparation including organizing construction workers and providing basic working and living conditions for them.

Time for Completion, Progress Mgmt, Time Adjustment

Project starts Oct 2006 (actually when Shishi issues the certificate for commencement) and lasts for 3 years. CXTI must follow Shishi's construction schedule without delay. The construction period includes
If Shishi delay's the project, they will coordinate actively with CXTI to ensure the project is completed as scheduled.

If CXTI is unable to complete the project as scheduled for the current month without Shishi's doing their part, then CXTI will "take effective measures to ensure that the remaining works are finished with those works of next month, otherwise, [CXTI] shall assume full liability for breach of this Contract, compensate [Shishi] for the resulting economic loss, and pay the penalty for breach of this Contract."

Shishi can adjust the schedule for any design alterations, acts of God, other cases. CXTI needs to inform Shishi within 3 days of any of these events. If Shishi doesn't respond, it's accepted.

If Shishi causes a delay, it's Shishi's responsibility.

Delayed Sart and Construction

Shishi can delay the start of the project, giving CXTI notice in writing. If CXTI is unable to start on time, it must submit written notice 3 days beforehand and assume responsibilities. A Shishi representative can request suspending construction if needed and provide further details of handling the project within 48 hours. CXTI must safeguard the project while suspended.

If CXTI suspends the project (including due to subcontractors or suppliers), then it's CXTI's responsibility. If someone else causes a delay, it's their responsibility.

Rights and Obligations

CXTI must confirm that it understands all the conditions and circumstances of the construction site. Shishi must approve the construction implementation plan, construction implementation, design plans, construction schedule. CXTI is responsible for organization, construction, management, coordination, etc.

CXTI must designate a site manager. CXTI does self-inspection of cable layout covering work. CXTI must keep records. CXTI must manage construction safety according to regulations. Accidents must be handled actively and reported in writing to Shishi.

CXTI submits monthly construction schedules and progress reports. CXTI monitors and inspects Shishi's on-site management personnel. Daily inspection.

When project is done and acceptance check is passed, the warranty period starts. CXTI must repair/replace/return goods and handle the expenses.

Shishi can request technical information about the project during construction.

CXTI will clean up the construction site of trash, temporary facilities, and move stuff out of the way to somewhere designated by Shishi. CXTI will do any needed paperwork. CXTI is responsible for quality issues, delay, damage to people and property, etc. CXTI will safeguard the technical confidentiality of the project. CXTI will provide the entire set of documentation. CXTI will perform training related to the project.

Project Modifications

Shishi can modify the contents of the project with 5 days notice and CXTI will do it. If CXTI finds a need to modify the project, they will notify Shishi. Shishi and the supervisor from CXTI will make a decision within 5 days.


CXTI will do safety education and provide safety equipment. CXTI will take active and effective action to prevent further loss (and is liable for additional loss). "When serious fatal accidents and injuries take place...." Shouldn't that be fatal accidents and serious injuries? Anyway, CXTI reports them in writing to Shishi and appropriate authorities.

If Shishi finds inadequate safety, it can demand CXTI amend it within a time limit. If CXTI doesn't, Shishi can suspend the project with CXTI bearing the loss.

CXTI will not damage Shishi's premises, fixtures, etc. bearing all losses. CXTI needs approval to pile up or process equipment on the site.

Delivery of Materials, Equipment

All equipment will be new and up to date, conform to "national inspection standards". Legal import papers required. All equipment has guarantees of repair, replacement, compensation from vendors. Documentation. Spare parts. Will conform to the specifications. OEM only. CXTI will notify Shishi 24 hours in advance of delivery to allow for quality inspection.

Installation, Development, Testing, Trial Runs, Acceptance

System implementation plans for all individual items. Installation and development can only start after Shishi approval:

Arrival of HW and acceptance check (Shishi and CXTI open packages together within 5 business days). Verify all parts, models, etc. Both sides sign off.

Install, test, acceptance check, trial run of the hardware system. CXTI will propose an installation plan 10 days before HW system install. Shishi and Supervisor sign off. After install/test of each sub-system, CXTI submits acceptance check application to Shishi and Supervisor. Acceptance check starts within 5 business days. Delays from Shishi or Supervisor will cause project to be extended. Shishi will compensate CXTI for costs after negotiation. If CXTI causes delay, we know the rest.

After install, test, integration, CXTI conducts self-inspection and submits it to the Supervisor. Afterward, the system enters the trial run period. After 10 business days, Shishi, CXTI, and Supervisor conduct internal inspection on the hardware system within 5 days.

At Page 13, Item 3

At this point, I'm going to skim through the rest, picking up the things I consider to be important.

Development, testing, acceptance, trial run of application software systems: 40 day trial run, then modification suggestions by Shishi, then 30 days to implement.

Trial run of the whole system: stable operation for 30 days. Then CXTI can apply for a project completion acceptance check, which Shishi and the Supervisor do.

Transfer of the project and documentation.

Technical support, warranty, and free maintenance lasts for 1 year after the whole project completion acceptance check. CXTI must send staff to repair problems within 4 hours of being notified. For the initial 30 days, CXTI will have qualified people on-site.

If the system remains broken for 48 hours, CXTI will provide back up equipment to maintain normal operation. Post-warranty period maintenance would be in a separate contract.

Deliberate destructive acts of Shishi's personnel, Shishi's attempts at maintenance are not covered by warranty. CXTI can charge Shishi for materials (but apparently not labor).

Note that deliberate acts by random people are not excluded!

Price, Contracting Method

$41 million dollars
5% is reserved and settled after project completion
5% is reserved as a deposit for warranty, after-sales service, training, technical support, etc.

CXTI provides capital to start the construction work (yeah, we know).

Preliminary Stage
Planning: $250K
Feasibility Report: $187K
E-Government Training: $250K
Hardware Platform (purchasing): $2.2 million
Hardware Platform (system integration): $327K
Phase 1 (90% paid 10 days after completion of Phase 1)
Security Platform: $1.5 million
Application Platform: $931K
Unified Admin Approval System: $1.6 million
Portal Website: $312K
Coordinated Office System: $1.0 million
Geography Information System: $3.0 million
Emergency Commending System: $2.3 million
Phase 2 (20% paid within 5 days of commencement, 50% paid within 10 days after requirements analysis report, 20% paid within 10 days of acceptance)
Auxiliary Decision System: $2.2 million
Social Medical Security Info System: $5.7 million
One Card Communication System: $4.4 million
Phase 3 (same payment schedule as phase 2)
Information Resource Library: $761K
E-Commerce System: $14 million

5% paid within one month of completion of the total project.
5% paid within 10 days of the end of the warranty period.

Acts of God (Forces Majeure) are borne by Shishi, with CXTI taking measures to minimize loss, reporting on the loss and cost of repair. If the project is delayed, both parties consult to decide whether to continue. If terminated, each party returns interests already acquired to the other.

If the project can't be completed due to CXTI's default, then CXTI owes 0.5% of the total project price ($200K) for each business day of delay, with a maximum of 20% ($8 million). A delay of more than 150 days renders CXTI unable to fulfill the contract and everything is returned and CXTI owes 20% ($8 million) to Shishi.

If CXTI can't deliver any part of the project, it's the same as being unable to deliver the whole thing. CXTI owes 10% ($4 million) to Shishi.

If CXTI can't fulfil after-sales service (any part of it), then CXTI owes 5% ($2 million) to Shishi.

If the types, models, specs, quality, quantity do not conform to the requirements, Shishi has the right to refuse acceptance, CXTI is in default.

If CXTI is unable to meet technical requirements of functions specified in the appraisal of experts, then if CXTI is not able to rectify the problem, CXTI owes 20%.

If Shishi defaults, it will bear the costs. If construction is delayed due to Shishi, then the period will be extended.

If Shishi demands returning of goods due to its own default, it owes CXTI 20% of the value of the returned goods.

If the project can't be completed as scheduled due to Shishi or Supervisor default, leading to CXTI's loss, the defaulting party will pay CXTI 0.5% of the total ($200K) for each business day of delay, not to exceed 10% ($4 million).

If Shishi demands replacement or upgrades, Shishi will pay "appropriate compensations" to CXTI.

If Shishi is late in paying CXTI causing a material loss, Shishi will compensate CXTI according to the loss.

Whoever terminates the contract without proper justifications owes the other for all economic losses incurred. If either party is in breach of contract, the other can terminate the contract and demand it to bear the default liabilities.

Shishi has the right to examine the qualifications of all sub-contractors and suppliers.

My Opinion
While the contract seems a bit one sided in favor of Shishi, it's not all that much worse than contracts I've been involved with personally. I wanted to go back and look for previous contracts that CXTI has entered, but I couldn't find any. The reason I wanted to check is that this contract doesn't seem to be all that terribly capital intensive. CXTI gets fairly substantial payments during the cycle. Hopefully this is a change from previous contracts.

In terms of completeness and quality of contract, it seems reasonably good to me. But the contracts I've personally seen were for significantly less money.

China Expert Technology (CXTI) wins a small contract

CXTI issued this press release today.

A short term contract worth $274K from today (it already started) until Oct 2006. This is with the Ning Bo City, Yinzhou District Government in the Zhejiang province of China.

The contract is for design and planning of an e-government system, so that means this is an early phase of a much larger project. Of course the overall project could fall through, but CXTI has a good success record so far.

Here's why this is a very significant deal: If you look at Note 17 in the recently issued 10-K statement (page F-25), you'll see this:
For the years ended December 31, 2005, 2004 and 2003, the Company’s major customers are two local government bodies in Fujian Province of the PRC which accounted for 100%, 100% and 99% of the Company’s total revenue in relation to the provision of consultancy and system integration for establishment of e-government information system and network.
Getting a contract in Zhejiang province means less customer concentration and less risk. From the press release:
We are extremely excited that the Yinzhou District Government has chosen us to design and plan for its e-government system as it is the first contract that we signed with a municipal government outside the Fujian Province. This is a major milestone for the Company in capturing e-government opportunities in other provinces in China. To cope with our future business development and the increase of our e-government projects, we have already enlarged our workforce. With the successful implementation of our projects in Fujian Province and the execution of our market strategy, we are confident that we can continuously expand our business to other areas in China.
One thing I like about a short contract up front is that it provides some cash early in the overall cycle. Hopefully, there will be cash coming in from contracts already running to limit the need for raising capital.

Thursday, April 06, 2006

Epolin (EPLN) announces dividend policy, 2 cents

Epolin announced a 2 cent dividend and a regular dividend policy.
Although we have paid certain cash dividends in the past, we never adopted a dividend policy until now. We believe our intended dividend level will still allow us to continue our strategy of sustainable growth.
The yield is now a bit over 2%. Meeeeow!

Tuesday, April 04, 2006

Strathmore Minerals (STHJF, STM.V) finds more Roca Honda uranium

...and that uranium just keeps getting more and more valuable. The spot price increased another 50 cents this week to $41.00. And in the uranium news at that link:
Florida Power and Light might build another reactor.
Nuclear power is significantly less expensive than coal in most countries.
Tony Blair is pushing for nuclear power.

But here's the Strathmore press release.
The Roca Honda property has gone through the NI 43-101 compliant resource estimate (most of the properties owned by Strathmore had work done, but before the stringent NI 43-101 standard was in place) increases the old estimate of 11.48 million pounds of U3O8 to 17.5 million pounds. This is a resource estimate. There's also an additional 15.8 million pounds of U3O8 classified as an inferred mineral resource (a less confident category). The increase was due in part because additional adjacent property owned by Strathmore was included in the calculation.

This was a qualified NI 43-101 done by a guy with 17 years experience in that region.

A year ago, the same guy did a NI 43-101 report reporting a historical resource of 11.48 million pounds of U3O8. Presumably this means using NI 43-101 standard methods on old data. I don't know the details of it.

Most of the 445 drill holes ("almost 1 million feet of drilling") was done previously by the prior owners, Kerr McGee.

Monday, April 03, 2006

CXTI convertibles

A big hat tip to George here

Ok, so now I see why both CXTI and ETLT have dragged in this bizarre set of rules for outstanding liabilities. Both of them have these floorless convertibles based on a fraction of the recent stock trading price. CXTI's is fairly easy to see. ETLT's is very small and associated with a legal settlement. I have to admit that I really didn't fully grasp the truly unlimited liability nature of these things.

I'm not worried about ETLT, where the face value of the convertibles is insanely small. But it's worth looking at CXTI more closely. If CXTI's stock price spent a week at some insanely low value before Halloween 2006 (how appropriate), then the dilution would be horrendous. Let's say CXTI drops to 20 cents for a week. Then the convertible holders get 40 million shares of stock in the conversion. Considering that my totally diluted estimated share count is 42 million, that's a nearly 50% dilution in ownership.

So it's conceivable that the convertible holders could manipulate the stock to increase their ownership of the company. Of course this could very easily backfire for them. It means having to sell possibly a gigantic number of shares for an entire week. There's no telling who might be sitting at the other end of the transactions, including people associated with the business, and how much money they'd be willing to sink into the company. Those people could end up buying a large part of the company at very cheap prices subsidized by the would-be stock manipulators. Here's another problem for them: there's a limit to how much of the stock can be sold. If someone gobbles up the shares and sits on them, then if the convertible holders short more than the float, they're screwed. Actually they're screwed well before shorting all of the float.

So shareholders look at this and see potentially unlimited dilution, but the convertible holders also have enormous risk in trying to manipulate the stock by any huge amount. A more realistic worst case would be CXTI selling for 90 cents for 5 days. In that case, the convertibles turn into less than 8.9 million shares.

We need to add that full amount to my share count, and probably bump it up to 10 million for a totally diluted share count of 52 million shares. Earnings for 2005 now look more like 17.9 cents per share and the stock would be currently trading at a trailing P/E of 10.

The convertible holders had a perfect opportunity back in early November 2005. And since the convertibles have such a short shelf life of one year, you'd think they would have done it back then if they were going to push the stock down and do the conversion. Here are the prices at that time:


Pushing the price down on Nov 4 and Nov 7 would have done the trick. Maybe they tried, I don't know. The volume was a bit heavy on Nov 7. At that time, they would have had no idea what developments might unfold over the coming year and news was at least as likely to be good (causing a higher stock price) as it was to be bad (giving them a lower stock price).

It's appropriate that I mentioned what Buffett wrote about Arcata in the 1988 letters to shareholders. With most of my investments, I view them as having two major parts, the first being very tangible and based on what seems clearly likely in the future. That's the part you'll see on this blog. The second part is the stuff that's difficult to pin down precisely, the possible payoffs that can't be relied upon. I can't say exactly how it might play out, but I want as much of it as I can get. Stathmore has a huge potential upside. So does ETLT, CXTI, and even EPLN.

With Buffett's Arcata, the market pushed the price of the stock even higher than the valuation of the tangible stuff that could be clearly nailed down and Buffett did something odd, but something he would do much more in the future: he continued buying at the higher prices because he started relying on the value of the icing on the cake. Ben Graham would never have bought Coca Cola at the prices Buffett paid, nor most of the private business purchases, I'd guess.

I look at CXTI and ETLT and see early businesses in what is clearly going to be a gigantic market in the future, not to mention the benefit of an overvalued US dollar in buying ownership of the businesses. CXTI could become an EDS and ETLT could become an ADM. Hey, Wal*Mart's own CEO said he thought the first Wal*Mart store was the worst store he had ever seen. But they don't have to be that successful for them to be extremely good investments today.

UPDATE: CXTI wins another big contract!

Amongst 83 cities and counties in Fujian province, only 7 of them have started their e-government construction and we have signed contracts with 6 of them.

UPDATE April 8, 2006: Why did CXTI get such a crappy deal when raising cash?
I don't know why CXTI paid a high price for cash. I look at other Chinese reverse mergers like Sunwin and they got reasonably good terms of around 6% interest. China Digital Media got diluted by a factor of 10, although I don't recall if it was raising cash or not. China Bak Battery raised $17 million on Jan 18, 2005 using shares at $1.98 and the shares soon after sold for around five dollars. That's in the same ballpark as what CXTI got. American Dairy raised $4.7 million (page 19 in the Notes) in 2004 selling 1.8 million shares of stock, 1.8 million warrants. Let's call it 3 million shares, which corresponds to getting about $1.56 per share. The shares were selling for over $2.50 during the entire year. So I don't see CXTI getting that much of a worse deal than other similar Chinese reverse merger companies.

EITF 00-19

NOTE: This is a work in progress.

The heirarchy of GAAP, from most authoritative to least:

A. Accounting principles promulgated by a body designated by the AICPA Council
B. Pronouncements of bodies, composed of expert accountants, that deliberate accounting principles or describing existing accounting practices that are generally accepted, providing those pronouncements have been exposed for public comment and have been cleared by A above.
C. Pronouncements of bodies, organized by a body in category A above and composed of expert accountants, that deliberate accounting issues in public forums: interpreting, establishing principles, describing practices that are generally accepted or by stuff in B that has been cleared by A, but not exposed for public comment.
D. Practices or pronouncements widely recognized in a particular industry or specific circumstances.

Category A: FASB's SFAS, APB's Opinions, AICPA's Accounting Research Bulletins
Category B: FASB Technical Bulletins, AICCPA Industry Audit and Accounting Guides that have been cleared by FASB, AICPA Statements of Position
Category C: AICPA AcSEC Practice Bulletins that have been cleared by FASB, consensus positions of the FASB EITF
Category D: AICPA accounting interpretations and implementation guides (Q&A), and misc stuff
Category Z: Google searches for accounting tips from strange websites.

(trivia: An auditor can't give an unqualified opinion if something departs from category A unless due to something weird it would make the statements misleading.)

IETF is the FASB Emerging Issues Task Force. Formed in 1984 by the FASB. Members come from public accounting firms and other experts. An IETF consensus is considered to be Category C GAAP.

According to Wiley GAAP 2002:
The EITF has been severely criticized for promulgating GAAP without sufficient due process procedures. Only a limited audience is aware of each issue, and the period of exposure is sometimes very brief.
Ok, so EITF Abstracts are considered Category C GAAP, like consensuses.

EITF Abstract Issue No. 00-10
Title: Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock
That kinda sounds like a country music song, doesn't it?

From the dates of discussion which go all the way back to 1987, it looks like this was the infamous battle over stock options that flared up in the early to mid 1990s and again around 2002.

This references FASB Statement 123, Accounting for Stock-Based Compensation, which is the set of methods that we've seen for a few years.
It also references FASB Statement 133, Accounting for Derivative Instruments and Hedging Activities
Also FASB Statement 138 which also deals with Certain Derivative Instruments and Certain Hedging Activities
And APB Opinion No 14, Accounting for Convertible Debt and Debt Issued with Stop Purchase Warrants
And lots of other Statements and Opinions and Stuff.

Like I said, this is a work in progress.

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