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Tuesday, May 30, 2006

Triangle Multimedia Limited (QBID) ends

QBID, which I had been following for entertainment purposes, is gone as a going concern.
Triangle Multi-Media Limited (Other OTC:QBID.PK - News) and its wholly owned subsidiary the Q Television Network (QTN) announced today that Q Television Network is no more. Effective 5:30pm Central time, the Q Television Network signal broadcasting programming was shut down. Previously, the entire Q Television Network staff had been terminated.
Well, at least they have their $2 billion film library, right? I mean, they said it's worth two billion dollars, right?

Well, that may have been a stupid statement, but the film library does bring in $200K per year in royalties... supposedly. If that's true, the library is worth perhaps $3 million (more if the royalties reliably grow over time, less if they're declining). But there are always those pesky liabilities.

They did release an annual report for 2005 here which looks like a scanned hand-typed piece of paper.

For June 30, 2005, assets are almost entirely the film libarary, which is carried at $7.7 million less depreciation (much of which might be against other assets). Total assets were $8.9 million. Unfortunately, there are over $16 million in liabilities.

The income statement shows "income" (actually revenue) of $3,344. Yes, that's correct: less than four thousand dollars. Direct costs were more than 100 times greater at $425K. G&A fixed costs were $7.2 million, making the revenue essentially zero.

So let's see if I have this correct. They burned up $7.2 million of fixed costs in six months to support revenues of three thousand dollars which cost $425K in direct costs against that revenue.

We then have another balance sheet for Dec 31, 2005.
Cash: $162K
Deposits for 2006 [gay] games: $1.1 million

Furniture, fixtures, equipment: $822K
"Transportation equipment": $396K
Leasehold improvements (Burbank Studio): $350K
Films/movies/videos: $19 million
Depreciation: $2.3 million

They show $450K intangible assets, licenses, permits associated with the Burbank studios.
They show $1.3 million goodwill for the Burbank Studio (sheesh!)

The liabilities increased to $37 million.
Due to Triangle Multim. Ltd. Inc.: $7.0 million (up from $6.0 million at the end of June)
Notes/loans payable: $25 million (up from $9.2 million at the end of June)

The shareholder deficit increased to $15.5 million (from $7.6 million at the end of June)

In the income statement for 2nd half of 2005, we see that income jumped up to... $9,644. Direct costs were even higher than the first half at $718K. G&A was steady at $7.2 million.

Congratulations to anyone who shorted the stock. And to anyone who actually owned shares in this thing, I'd hand that worthless outhouse wallpaper over to the most ruthless legal pit-bulls I could find.

Today, the best bid is "Unpriced" and the best ask is $0.0001 (which are probably short sellers covering).


Whoever ran this train-wreck, feeding-trough of a business are bastard people. That's right, they're just bastard people and I'm just gonna go home and I'm gonna, I'm gonna bite my pillow is what I'm gonna do!

Actually, this business seems not far from criminal in my opinion depending on how much (if any) of the huge expenses in cash went to related parties or how much of it went towards increasing the lifestyle of those involved instead of directly advancing the business.

UPDATE: Saturday, June 3, 2006
James Altucher of RealMoney's Blog Watch calls this an autopsy. He mentions the 38% year-over-year growth in Internet advertising.... and I sold ValueClick at $4.40, thinking that was full value. We all have things that we kick ourselves about.

And what amount of money would I need to retire? I have to admit that I'm not retired and despite the fact that I'm still young to be retiring, I really, really want to be in retirement. Not because I'm lazy and I do love my job oh so much [they read this blog sometimes], but because of all the things I want to do that have low, uncertain, or very lumpy returns. Well, I have one kid finishing up college and another one that's starting. So that affects the number a great deal. But putting aside the cash needed for college, I think a better question is what percentage draw per year is reasonable? Over at the Retire Early Home Page, they seem fixed on 4%. I'd go higher than that because I intend to keep working as an investor and I've been beating the S&P 500 fairly consistently, but I wouldn't go much higher than 4% because I don't need the stress. So let's say 5% or 6%. I'm not far from my goal, but then I said that back in 2001.

Monday, May 29, 2006

Checking back with Mr. Market: 2

Checking back with Mr. Market: 1

C O M P A N I E S - I - R E J E C T E D

Butler National Corporation BUKS sec Stock was around 65 cents. It dropped to below 30 cents, then went above 60 cents and is now 35 cents at the ask. The problem I had with the stock is that the business has a one-shot type of revenue source for overauling Learjet 20s for reduced vertical separation minimums. The quarter ended Jan 31, 2006 had much lower sales than 2005. Essentially breakeven. They're hoping to get FAA approval for Lear 30 installations to begin in Q4. So perhaps there's lots of work for them in the future. When you look at the revenue changes, you'd expect to see wild stock price swings. The aircraft modifications are low margin. Share count increased enormously (handed out options like candy in 2005). Not surprising to see wild price swings.

The Experimental Agency XAIN The stock has gone nowhere 45 cents/51 cents. Here's what I wrote:
Results have been pretty crappy, but it's not clear to me yet whether this is because the industry and/or company is crappy or if they're simply ramping up. If they're ramping up, the stock would be worth at least 70 cents. It's currently selling for about 43 cents.
Nothing surprising.

Yi Wan Group, Inc. YIWA I thought they might be a good investment (stock was around 35 cents) until I started seeing bad results for the hotels. I last looked at them here at the end of Jan 06:
Stock has tanked to 8 cents on the ask from 28 cents. They never released Q3 results, their website has expired, there's no news. This is very troubling. I want to continue following it just to see what happens.
The stock went back up to 20 cents and is now back to 8 cents again (last sale). Nothing surprising.

Schuff International SHFK Steel company. I tossed them because I believed they had no pricing power, figuring earnings would be 25 cents/share, making the stock worth $4.00 and selling for $3.50. Mr. Market disagreed! The stock now sells for $11.15. Three bagger! If we look at Q1 2006, we see a fairly strong balance sheet, lots of debt leverage, revenues increased around 50% but gross margins decreased to 18% from 21% (aha!). Net income for the quarter increased to 81 cents from 42 cents diluted. Free cash flow is actually lower than the prior year's Q1, but it's all lumpy. The answer is that these guys have been doing acquisitions and earnings are very high [right now?]. If we look at the annual report for 2005, we see that revenues in fact have been climbing for years. Earnings per diluted share were $2.42, which means the stock was selling for a bit over one-times-earnings. Very silly. Giving myself some credit, I did see that it was probably cheap here. However, overall I was wrong. My estimate of earnings was ridiculously pessimistic.

Solitron Devices SODI The stock jumped to $2.20 with no news in October 2005. I stopped following it soon after. The stock is now selling for $4.00, down from around $4.50. 3 bagger! Did I miss it, or was it not easily knowable? I noted a lot of big issues here such as bankruptcy obligations, superfund site issues. Let's look at SEC filings. They earned 10 cents diluted in Q2 (ended Aug 31) announced in October 2005, 23 cents for the first 6 months. I was too focused on what could go wrong and not focused enough on how blatantly cheap the stock was. Sound familiar?

With both SHFK and SODI, I took something fairly simply and made it too complicated.

T E M P O R A R Y - I N V E S T M E N T S

YaSheng Group YHGG Unless the company is a partial or total fraud (which is entirely likely in my opinion), I'd expect the numbers to continue to be good and for the stock to potentially climb to around $6.00. The problem is the un-audited results (but ETLT proved that even having auditors doesn't stop errors in numbers-adding-up). The stock price is around $2.90, which is entirely within reason based on my thinking at the time. Today (May 29, 2006, Memorial Day), the company announced results for the year ending Dec 31, 2005. Wow, they're even later than ETLT. Revenues were up somewhat. Earnings again are 40 cents per share. They're still trying to get an audit complete, but went ahead and announced results for 2005. Haha! This press release points to a non-existent financial statement, unless the results for 2005 are "404 not found". So they're still screwing up. I was correct so far.

...for Memorial Day

Sunday, May 28, 2006

Opthalmic Imaging Systems (OISI)

OISI (sec) makes technology equipment for ocular industry: fluorescein angiography (blood is dyed, camera looks at retina, creates a "road map" for laser treatment).

Stock is selling at $1.89 and has been dropping.

According to the 10-K, gross margins are dropping (58%) and expected to drop due to a shift to "Ophthalmology Office" software products (do they have a little animated paper clip, or pair of glasses?). Also looking at the 10-K, earnings have consistently been around 11 cents per diluted share (with increasing share count). Gross margins for Q1 are 57%.

2005: $13.7 million
2004: $11.3 million
2003: $10.3 million
2002: $8.5 million
2001: $7.0 million

Net income each year has been increasing at a lower rate, mostly due to lesser benefits from income tax. So the 11 cents earned per share is more real lately, although distorted by tax NOLs and kept down by an increase in shares (mostly due to convertables converting to shares, Note 5 in 10-K).

Cash flow from operations minus capex:
2005: matches net income, but not good (AR increase)
2004: weaker than net income (AR increase, deferred tax asset boost to earnings)
2003: weak
2002: ok
2001: negative

63% of revenues are to MediVision (up from 57% in 2004).

Q1 Results: 16 million shares on May 10, 2006.
Balance sheet is rock solid.

Revenues up 45% over prior year
Sales and marketing costs: 23% of sales (down from around 27% historically)
G&A: 10%
R&D: 10% (this has been climbing from 7%)
Operating margin: 14% (up slightly)
No taxes
Net margin: 13%

I don't see why this stock is selling for more than $1.50. But less than 2 years ago, it was selling for around 70 cents.

Checking back with Mr. Market: 1

Let's see how stock prices have done on companies I looked at over the past year.

What I want to look for here are any large disconnects between what the market has done in the last year and my views of these companies. I want to look for cases of large gains or losses and see if (considering the news and financial statements, if needed) they clearly disprove anything I might have written.

C O M P A N I E S - I - R E J E C T E D

b-Fast Corp BFTC not enough volume to say anything

Lift-A-Loft LIAL no info

Lincoln Logs LLOG changed to LCLG, stock is now... um... $230. 1-for-500 reverse merger to drop the shareholders of record to less than 300 so they could go dark, which they did in Sept 2006. They were still losing money in the last readable financial statements.

Balistic Recovery Systems BRSI down about 50% WHY? I had noted here that they earned a penny in Q2 05, but cash flow was terrible. R&D increased. Increased pricing pressure. The quarter ended Mar 31, 2006 was lousy. Revenues were up, but not as much as R&D (as I had noted before) and SG&A. They had operating losses and interest expense increased (as we might expect). Cash flow from operations was hurt by inventory increases. This is not very surprising.

Bank of Salem, Oregon BSOG about the same ($17).

Bay National Corporation BANI (now BAYN) I liked this almost as much as Bank of the James. Stock went from $17.50 to around $19.

River City Bank RCBK Stock went from around $11 to around $12.50
Commonwealth National Bank, was CWEA, now CNB Financial CFNA stock is now $13.50, was around $12 (did a one-for-one stock trade)

Wintrust Financial WTFC stock has been all over the place. Was around $50. Went as high as $59.64 and as low as $46.74, is now about the same at $51.32. They had a big drop in April 2006.

Pacific International Bank The ask was $17 when I looked at them and their website now says the bid is $15.50.

BGI Inc BGII The stock was at 40 cents. The last sale was at 80 cents. Two-bagger! WHY? I had ruled them out because they went dark and no longer have audited results. But otherwise, I was quite positive about the company when I last looked at them in Feb 2006. They announced 188% increase in net income for Q1 (3 cents per undiluted share). Their results for 2005 were kickass (9 cents per diluted share).

Billy Martin's USA BLYM I had strong negative view of BLYM and the stock is now down about 90% from the half-cent it was selling for when I looked at it. The market ended up agreeing with me.

Amen Properties AMEN I had viewed the company as solid years ago, last year I checked back and was not interested at $6.35 per share. While the stock went up to $8.40, it's now down to $5.33. Nothing surprising there.

Blue Valley Bank Corp BVBC Stock was at $27. I figured it was worth $22. The bid/ask is now $29.10/$32.00. Nothing surprising there.

BNS Holding BNSIA Was liqudating. Stock is now around $5.60 (was $6.70). No dividends paid. Nothing surprising there.

Bogen Communications International BOGN I figured it was worth $6.50 and selling for $5.05. It's now selling for $7.10, climbing fairly steadily. Nothing surprising there.

Bonal Technologies BONL They were selling for less than 50 cents with a 14 cent profit (but I found their patent expiring soon). So it didn't surprise me all that much when they declared a 4 cent dividend and the stock went to 90 cents. The last sale was $1.22. Here's their 2005 annual report with audited results, but where's 2006? At this point (when considering the Oct 2005 results), I still don't know what will happen when the patent expires. It could be that they simply have a great deal of expertise and trade secrets to retain a moat. I don't know. And that's the key.

BonusAmerica revisited here BAWC The stock has wobbled around but gone nowhere. Nothing surprising there.

Bowlin Travel Centers BWTL Stock was at $1.80 when I first looked at it. It's now $1.80/$2.00. I noted that they consistently did about 10 cents a share in earnings, so the current price is not the least bit surprising.

BrandPartners Group I noted alleged fraud here BPTR The stock has dropped from around 80 cents to around 25 cents. In Q1 2006, the margins had gone to hell, they started losing money, and started looking pretty lousy. This was a correct call, in my opinion.

Broadleaf Capital Partners BDLF I had commented on how horrible their balance sheet was. I had said the stock was selling for 10 cents, but it was really 1 cent. Today it's about the same. That's actually surprising. Let's check out their SEC filings. Oops, nothing since 2004. The market cap is around $70K, which might be the value of a messy shell company, I don't know.

Bulldog Technologies BLLD Stock was trading for well over a dollar at the time. It's been plunging and now at 62 cents on the ask. I last looked at them on Jan 21, 2006. They were late in SEC filing for no good reason. More recently, a director resigned, The Port of Ensenada, Mexico (Baja, just south of Tijiuana) identified Bulldog for container security as Ensenada ramps up for cargo traffic. Another Mexican port is also looking at Bulldog. Bulldog's 10-Q for Feb 28, 2006 shows a weak balance sheet (but not as weak as it looks). Holy cow, they actually have revenue now. $80 of sales (with $25K gross profit) vs SG&A of $1.4 million. They've got a deep hole to climb out of. However, this could possibly be successful in the long run. 24 million shares and who know what sort of options and warrants... I see 4.3 million warrants. 2.1 million options. It looks like there's also around 4 million convertable notes (converted at $1 per share) plus 1 option each, so it looks like 8 million shares diluted (might be only 5), but I'm not sure. So given the current 25 million shares and the balance sheet and horrible situation, I'd assume total dilution of about 40 million shares if the company starts to be successful (doesn't matter if it's not, since "nuthin from nuthin leaves nuthin"). I had noted Mexico as a big possibility back in January (above). However, I don't know what this company is worth. They need about $20 million in revenues per year to break even. It's a race against time for BLLD to ramp up revenues before they go under and/or get diluted into dishwater. Overall, I'm not even slightly surprised how it's turned out so far.

Burnham Holdings BURCA The stock has dropped from around $25 to $19.30 last sale. I had noted that sales took a hit in Q1 2005, but earnings averaged around $2.20/share with $1.12 dividends. This Q1 2006, they had a loss, which was made worse due to the ongoing startup costs of new manufacturing initiatives. They made money in the year 2005, I guess that Q3 wasn't too bad. I guess the point is that housing is slowing down and sales of boilers, furnaces, radiators, air conditioning systems, etc. are going to drop. But these guys serve industial and commercial markets, too. I'd guess the stock is probably somewhat cheap right now, however... you can tell the big problem by the fact that book value is greater than the market cap: low return on assets. That means it's capital intensive. And beware of those types of companies in times of inflation. Nothing surprising since I looked at it.

T E M P O R A R Y - I N V E S T M E N T S

Live World LVWD it's gone nowhere

BakBone Software BKBO about the same

Bank of the James BOJF I liked this one so much I used it as a yardstick for other banks. The stock has gone from $14 to $21.

Seacoast Bank SCCB
The stock has gone down from around $11.50 to around $10.10

[left off with Butler National Corp, 7/16/05]


At this point in time, the inflation picture is fairly clear. Inflation is the result of flooding everything with cash. In this case, prices which could go up, did go up. Prices which could not go up, didn't. Anywhere people were bidding on assets with limited supply, you'd see the price rise: housing, stock prices, bonds. Anywhere you had a potentially unlimited supply, you'd see the price stay the same or even drop: manufactured stuff, many commodities, services that can be easily outsourced. Anywhere people could use their money to increase their standard of living, they did (big screen TVs and SUVs). At times some commodities became somewhat scarce, like steel and oil. But I believe that's a temporary thing as the world is capable of enormous supply of these things, even oil.

The cost of living has definitely increased, but very unevenly. Parts of the country where jobs have pricing power have resulted in huge increases in housing prices. The "average" car that people view as being "normal" costs about twice as much as it did 10 years ago. Same goes for what people view as "normal" television viewing equipment. It's like San Francisco during the gold rush when it was cheaper to send your laundry to China than to have it done locally.

But these things don't impact my investment activities. It's just armchair economics.

Friday, May 26, 2006

CPI Aerostructures (CVU) director resigns

CVU issued an 8-K to announce an independent director resigned, who was also chairman of the audit committee.
Mr. Providenti advised CPI Aero that his resignation is not the result of any disagreement on any matter relating to the Company's operations, policies or practices. Mr. Providenti stated, "My time on the CPI Aero Board of Directors has been very productive, but I have determined that my time now needs to be dedicated to personal matters."
I'd be more willing to believe that except that he just joined as a director in 2003.

According to the proxy statement, Providenti had stock options for 100,000 shares (1.8% of the company). He's around 68 years old.
A. C. Providenti has been a director and chairman of our audit committee since February 2003. Since 1984, Mr. Providenti has served as president of A.C. Providenti & Associates, Ltd., a consulting and strategic advisory firm. From 1977 to 1984, Mr. Providenti served as senior vice president for finance and administration and as an executive committee member for Northville Industries Corp., a multinational petroleum storage, trading and distribution company. Mr. Providenti holds a Bachelor’s degree in Accounting from St. Francis College and a Masters of Business Administration from Fordham University.
This is not good news.

On the other hand, Midwood keeps buying more shares.

Eternal Technologies (ETLT) Q1 Results

ETLT's quarterly report is out. In addition, many of the red flags that I've been concerned about have been answered reasonably well.

The auditor answered the question about the $200K difference relating to stock options.

The auditor acknowledged what is essentially a typo in the cash flows from investing activities.

The egregious stock options are extreme, but the salaries have been very low, even compared to Chinese companies that I've looked at.

A message board poster provided a good explanation for Heron's actions as investor relations here, ETLT, and Thomas Tedrow. The argument matches public information and what I've seen from ETLT.

And then there's E-Sea's first half 2005 results. There was the big issue about $1,445,783 of contributed capital. Let's go back to that E-Sea financial statement for the first half of 2005. In the cash flow for 2004, they show a decrease in cash of $1,445,783 for "Patent use right" in cash flows from investing activities. Of course, this showed up as "Other Income" for the 6 months ending June 30, 2005, which boosted net income by as much. Then in cash flow from financing activities, we see the same $1,445,783 show up as capital contributed. We also see $2,409,639 of capital contributed in 2004 and based on the balance sheet, we see that this represents the entire initial equity capital of E-Sea. So it appears that E-Sea spent $1,445,783 for patent use rights in 2004. Whatever fancy footwork E-Sea did, they made it seem like the company had earned more than it really did. But as I've always known, that was E-Sea. My main disappointment was that this recent audit didn't clean that up. I've sent an email to the auditor about it. I suspect they'll respond by saying that it lies outside the scope of the audit.

When I weigh all of these things together, it tips the balance back toward ETLT and I'd like to get back in if I can get a reasonable price.

The market may well view the quarter's results to be bad, but I believe they're actually quite good.


40,567,300 shares on May 15, 2006, unchanged since March 31, 2006.

The big thing to notice about the balance sheet is that the AR has dropped way down, which is excellent. Cash is up to $23 million. Cash plus short-term investment is $33 million or 81 cents per share. Net cash is above 76 cents per share.

The short term investment has been revalued up slightly.

Equity is up to $48.7 million or about $1.20 per share.

Revenues would have been only $607K except for a one-time sale of lamb meat (the high margin stuff) of $3.6 million. I said before that this is a lumpy business.

SG&A is down because 2005 Q1 SG&A included one-time costs. Without these in 2005, SG&A would have been up slightly due to E-Sea.

Changes in derivatives screwed up the income statement, and will continue to do so in the future.

Net income was reported as $541K. This is fairly meaningless because of the huge one-time sale of lamb meat and the derivatives wobbling.

E-Sea created some non-agricultural income which was taxed.

No changes in the legal situation.

Here's the most important thing in the quarterly report: it's all up-front and plain spoken. I see no funny business.

So you're probably wondering how I can say all this and not feel stupid. It takes great concentration and focus. All I can do is recommend reading Chapter 3 of Influence: The Psychology of Persuasion for the best explanation for my lack of concern about waffling. The chapter begins with this:
A study done by a pair of Canadian psychologists uncovered something fascinating about people at the racetrack: Just after placing a bet, they are much more confident of their horse's chances of winning than they are immediately before laying down that bet.... It is, quite simply, our nearly obsessive desire to be (and to appear) consistent with what we have already done.
I reserve the right to change my mind based on new information or even without new information (simply thinking about the information further). I've done it before and I'll almost certainly do it again. Investing in ETLT at this point in time is a very complex and difficult decision. There is additional overhead and possible loss or failure to gain based on changing my mind, but I have no better way to go about investing.

UPDATE 12:45 PM same day:
Well, I bought back in, averaging between 53 and 54 cents.

Epolin (EPLN) 10-K

Epolin 2005 10-K

Full year ending Feb 28, 2006
11,966,355 shares on May 1, 2006. 557K options outstanding. 413K for future granting. Assume 13 million totally diluted shares.
Based upon our years of experience in the specialty dye
business, we believe that the Company possesses the largest
offering of near infrared (NIR) dyes in the world.
Expenses due to compliance with environmental laws increased from $18K to $21K.
R&D costs increased somewhat to $447K from $408K.
Limited competition (EPLN has a very broad range of dyes and a very high level of technical service).
Still no patents.

2006: Two customers were 30% of sales. Two other customers were 14.3%.
2005: Two customers were 44% of sales. One customer was 6.4%.

Still 10 employees.

Same properties. The sublease (at $18K vs $36K) is still going on, ends Halloween 2007.

Regular dividend of 2 cents (which we saw earlier).

200K stock options granted at 54 cents per share. Also the 162K 2004 stock options were cancelled and reissued at 41 cents per share (up from 35 cents). 5 and 10 year expirations.

5000 shares were repurchased at 72 cents.
                                                  Years Ended

February 28, February 28, February 29,
2006 2005 2004

Revenue change +28.5% +5.3% +1.6%

Sales 100% 100% 100%
Cost of sales 38.9 40.1 30.3

Gross Profit 61.1 59.9 69.7
Selling, general and administrative 37.3 31.7 29.1

Operating Income 23.8 28.2 40.6

Income before taxes 25.4 29.7 42.1

Net income (after taxes) 16.1 17.5 21.7
Revenues increased in all products except specialty chemicals (which decreased). Strong increases in newer product areas such as security inks and coatings. Also overseas sales increased in Japan, Korea, Taiwan, Europe.

(Note that 2004 looked good due to the elimination of a deferred compensation liability)

85% increase in sales in Asia.
115% increase in sales in Europe.
11% increase in North America.

US: 73% of revenues
Asia: 15% of revenues
Europe: 9% of revenues

US: 84% of revenues
Asia: 13% of revenues
Europe: 5% of revenues

US: 90% of revenues
Asia: 6% of revenues
Europe: 4% of revenues

Traditional markets (welding dyes, eye protection) sales were flat. More emphasis now on technical service which has added new customers and new applications.

Gross margins increased only slightly due to increased material and overhead costs (I like a company that apologizes for not having bigger increases in gross margins due to material costs).

SG&A increased due to: 1) officers' salaries, 2) employee benefits, 3) cosmission expenses, 4) professional fees. The commission fee structure has changed and will be lower in the future.

Other income dropped due to the decrease in sublease rate (which will impact next year slightly more) more than offset by by greater interest income ($30K vs $8K).

Net income is $594K or 4.57 cents per totally diluted share. A P/E of 15 would only be 68.6 cents. I was willing to pay a higher price for Epolin because of several factors. I'm increasingly believing that it was worth it.

FIFO inventory.

Auditors: Weismann Associates, Livingston, NJ, same as last year. Unqualified opinion.

Balance Sheet
Cash ***************
AR *******
Inventories ******
Total Current Assets ****************************

PP&E ********........
Non-current deferred tax assets **
Life insurance policy **
Total Assets ****************************************

Accrued expenses ***
Total current liabilities ***

Other liabilities ***

Common stock equity ***********************************

Net Cash ********* $882K, 6.8 cents per totally diluted share

Income Statement for Q4
                      Q4 2006                 Q4 2005
Sales increased 22%
Sales $ 1,068,776 100% 873,116 100%
Cost of sales 477,836 45% 448,830 51%
SG&A 482,105 45% 281,208 32%

Operating income 108,835 10% 143,078 16%

Rental income 4,500 0% 9,000 1%
Interest income 17,908 2% 2,516 0%

Income taxes 42,965 4% 63,156 7%

Net income 88,278 8% 91,438 10%
The increased SG&A caused the decrease in net income. SG&A is largely set based on projected future revenue. If sales grows another 22%, then SG&A might shrink to 37% of sales and net income might grow to 9% of sales. However, notice that net margins for the full year are twice this much. That means the increase in SG&A in Q4 of each of the years has an exagerated impact on the Q4 bottom line.

Equity Statement

130K stock options exercised. 5K shares repurchased. $594K net income. Simple stuff.

Cash Flow Statement

AR is up. Inventories are down. There's some accrued but unpaid expenses. Cash flow from ops was $704K.

Capex was $182K. Free cash flow is a bit lower than earnings, but some of that could well be investment beyond maintenance capex, considering depreciation was only $47K.

Dividends paid was $236K. And that's about it for cash flow. Clear and simple.


Three customers are 44.5% of accounts receivable.

Depreciation schedule is unchanged from last year.

Advertising costs:
2006: $19,304
2005: $18,861

Inventory makeup is about the same as last year.

Pension plan: company matches 3-5% after 1 year of service.
2006: $49,940
2005: $40,119

Stock options granted:
2005: 0
2006: 200K
Balance on Feb 28, 2006: 457K (an additional 100K is in, probably CEO's, employment contract)
Average strike price is 42 cents.
413K available for future grants.

The vast majority of accrued expenses ($195K of $307K) is due to employment agreement.

CEO gets 10% of any increases in net income. So far, the accrued bonus is $10K.

R&D costs:
2006: $447K
2005: $408K


Let's say that net margins going forward are only 15% while revenue increases by 40% over the next few years. This would result in net income of $777K or 6 cents per totally diluted share and the stock might be worth 90 cents (plus you might add in half of the net cash) which is about where it's selling now. Clearly this stock isn't cheap. That's why I stopped buying it as the price was going up. However, if the revenue increases by 70% and net margins return to 17%, then it might be worth $1.23. That's about the value I had in mind when I bought the stock and that's still about the value I consider it to be worth. But I don't recommend buying the stock for anything more than 75 cents.

[June 5, 2006: However, if you were going to make EPLN say 3% of a highly diversified portfolio consisting of stuff like mutual funds, then EPLN would be a fine addition considering that the S&P 500 is now priced at about full value and EPLN is an above-average business in terms of return on equity, return on assets.]

Continue owning

Tuesday, May 23, 2006

Pharsight (PHST)

PHST (sec) Software and consulting services for pharm and biotech companies to improve efficiency of drug development decision making process. Clinical trials, simulation, computer-aided trial design, statistical analysis, etc.
Thirteen of the world’s largest 50 pharmaceutical companies utilize our strategic consulting services, the world’s largest 50 pharmaceutical companies apply our computer-assisted drug development products, and our software applications are currently licensed for use on more than 3,700 researcher desktops.
Seems like a reasonable business to be in. If you look at their 10-K page 16, you see a tough, but solid uphill climb. Revenues have been increasing each year until they hit a wall this year. Gross profits are going up. Total operating expenses are coming down dramatically (could be bad). They had huge losses in 2001 and finally reached profitability in 2005 (Q4 2004), but with preferred stock dividends and significant people on the totem pole above common stockholders. The equity got burned off to the point where they're at a deficit.

2003: $14.0 million (see 10-K, page 16)
2004: $17.7 million
2005: $22.6 million
2006: $22.7 million (see link below)
2007: $25.5 million (company's projection)

Results for Q4 ended March 31, 2006
They had a net loss for the quarter (vs profit in 2005) and for the year.
Revenues have declined in Q4 due to a drop in service revenue, caused by a slowdown in new projects at one of the larger customers and "a shift this quarter in the revenue dependency away from our two largest customers (translation: their biggest customers are doing less business with them).
R&D costs are up.
Sales and marketing costs are up.
G&A costs are up.
These costs are considered investments by the company.
For they year, they would have had a slight profit, except for the preferred stock dividend. The pfd shareholders can elect to be paid in preferred shares instead of cash (ugh!).

Balance sheet is surprisingly strong. More than 60% of the assets are cash. The current ratio is a bit greater than 1 with the largest curr liability being deferred revenue. However, the shareholder deficit is 15% of total assets.

Projections for the year ahead:
Revenue growth of 10-15% based on the pipeline of software deployment and projects and contracts.
Roughly the same gross margins.
Net income on the order of $1.2 million (subtracting a pfd dividend of $700K from the 7.5% net income on the 12.5% revenue growth estimate).
I'm guessing it would be around 6 cents per diluted share assuming the share count remains fairly constant, but that might not be considering convertables very well.
Expect weak cash flow.

Common shareholders here have it tough, and depending on the deal with the preferred shareholders, they might gain very favorably from any continued improvement in the business. However, the stock is selling for around $1.35 and it seems fully priced.
continue following

Monday, May 22, 2006

Eternal Technologies (ETLT) 10-K

pink sheets, yahoo, sec, website
(Yahoo news location is temporarily here)
(Pink Sheets location is temporarily here)

2005 10-K
2004 10-K
2005 Q-3

Diluted Share Count

As people who read my writing here know, I tend to account for dilution from stock options by backing out any charges against earnings from options and then assuming that all options will end up turning into shares with zero capital contributed (i.e. I assume stock options have a strike price of zero except in some cases where that greatly distorts the view). My reason for doing that is because I'm only going to be buying stocks that are very cheap... or at least that's my intent. Therefore, most stock options issued are going to be highly dilutive compared to my valuation of the business, assuming that I'm going to invest in it. So if the stock is in fact not cheap, I'll end up being too pessimistic and arriving at a value that's too low, but I don't care because I wouldn't want that stock anyway (this is a case where the grapes really are sour).

The exception is the case where the stock options strike prices are very high relative to the current stock price, which happens when a stock has recently fell out of favor. It's important to watch for those cases. Another exception is toxic convertables, which I've recently received an education in. In that case, I think a fair approach is to guess what price the stock might fall to (or could reasonably be manipulated down to by someone skilled in the art of stock manipulation) and assume a conversion at that price.

So I'd like to come up with my estimate of a totally diluted share count. According to this 10-K, there were 40.6 million shares outstanding on May 16, 2006. There were 39.9 million shares outstanding on Dec 31, 2005. There would appear to be 5.5 million options outstanding on Dec 31, 2005. However, if you read the text on page 43, they say that all 2.5 million options have been exercised. Pause to let that sink on.

These guys get approval to issue 2.5 million options and in less than 6 months
They obviously haven't learned the fine art of at least pretending to treat the options in the manner they're intended (a carrot for the future based on employee performance to increase the value of the business over an extended period of time).

Somewhat toxic convertables are extremely small.

I'm going to assume 49 million totally diluted shares because these people are frickin out of control.

Short-Term Investment

Cash decreased to $18.2 million (from $24.2 million). However, short-term investment appeared in Q4 at $9.9 million. Note that the company never provides any detail about what this short-term investment is, and that bothers me. It makes me slightly nervous that accounts receivable was $9.2 million at the end of Q3 and then this short-term investment of nearly identical size appears in Q4 (while AR drops a bit in Q4). If this was a factored receivable, it should show up as such on these audited financial statements.

According to Wiley GAAP 2002, short-term investments are readily marketable securities acquired through the use of temporarily idle cash. Note that is not cash equivalents which are short-term investments that are 1) readily convertable into known amounts of cash and 2) are so near their maturity (three months or less) that they represent negligible risk of changes in value due to interest rates. ETLT's short term investments are therefore not readily convertable into known amounts of cash and/or have risk of changes in value.

Since the short-term investment on the ETLT balance sheet is classified as current, this means ETLT is willing and able to sell it to meet current cash needs or that it will mature within 1 year. These investments are either held-to-maturity or available-for-sale (depending on obvious factors). ETLT doesn't need to explain the category on the balance sheet. If the short-term investments are in two groups, then the Notes must provide more detail. Since ETLT's notes don't provide this detail, I'm assuming the short-term investment is a single category.

In theory, the short-term investment could be stocks, bonds, warrants, various options. There's $189K of interest income for 2005, $50K of that was in Q4 ($42K in Q3, $48K in Q2, $49K in Q1). So it doesn't seem like the short-term investment is something paying high interest like a junk bond. Whatever it is, it falls outside the scope of cash equivalents.

Q3 vs Q 4

The first thing I want to do is compare Q3 2005 with Q4 2005.

Balance Sheet
Cash decreased from $24.2 million to $18.2 million
Short term investment appeared at $9.9 million
Cash+short term investment increased to $28 million from $24 million
AR decreased by $2 million
Inventories decreased to $135K (from $375K)
Total current assets increased by $2 million (cash+invest partially offset by AR decrease)

ETLT advanced $520K to distributors, which is non-current.
net PP&E increased to $7.3 million (from $6.9 million, presumably from E-Sea acquisition, partially offset by depreciation)
net Land use rights decreased only slightly (25 year lifetime) to $4.8 million (amortization seems slightly different from the amounts stated in Q3)
Intangible asset from E-Sea of $1.3 million

AP dropped by half to $707K
Amount due related party decreased
The all-important Derivative financial instrument liabilities appears at $563K
Total current liabilities decreased to $2.0 million (from $2.7 million).
All liabilities are current

39.8 million shares outstanding on Dec 31, 2005 (nearly all were outstanding on Nov 14, 2005), a big jump from the 30.7 million outstanding on Sept 30, 2005.

Additional paid-in capital increased by $2 million (about 22 cents per additional share?)

Retained earnings increased by $1.7 million.

Total equity (including currency translation gains) increased by $4.86 million.

Income Statement for Q4 2005 (vs Q3 2005)
note: some numbers won't add up due to accumulated rounding differences

Sales: $5.74 million (up from $5.03 million)
Cost of Sales: $3.05 million (down from $3.51 million)
Gross Profit: $2.69 million (up from $1.51 million)
Gross Margin: 47% (up from 30%)

SG&A: $1.14 million (down from $2.95 million)
Depreciation and Amortization: $0.27 million (up from $0.19 million)
Interest Income: $49K (up from $42K)

Change in Value of Derivative: $245K (not shown in Q3, although it would have existed)

Net Income: $1.03 million (probably an increase from what might be roughly $0.8 million)

Based on my totally diluted share count of 49 million shares above, which means backing out the $245K of derivatives value change, I'd say the earnings per share for Q4 are 2.6 cents per share, which would tend to portray the shares being worth $1.56 each annualizing it and slapping on a P/E of 15. Obviously, you'd discount that quite a bit for all the issues about China and such. But this doesn't assume anything about the future, it's just a mindless formula that I tend to use for gauging things.

Equity Statement
visual format

Shares at start of year ****************************** 29.9 million shares
stock issued for services +
stock issued to employees ++.
E-Sea acquisition ++++++
reclassification of unregistered stock +
Shares at end of year **************************************** 39.9 million shares

Cash Flow Statement for Q4 2005 (vs Q3 2005)

Net income: $1.03 million
Depreciation+Amort: $0.27 million
Derivative valuation adjustement: $0.25 million
Stock compensation for services etc.: $0.25 million
Inventories: $0.25 million
AR: $2.62 million
Prepaid stuff: ($0.14 million)
AP: ($0.91 million)
AP to related party: ($0.18 million)
Cash flow from operations: $3.36 million (remember, this is all for Q4 only)

Purchased $9.9 million short term investments
It's not clear what happened with capex due to reclassification, it might have been around $400K.
Sold a patent for $321K.

Sold stock for $1 million
Got $80K from presumably stock options.

Description of Business
There are some minor changes to the text from last year, plus the addition of E-Sea stuff. The Inner Mongolia farm now truly has impediments (the text changed "may have" to "have). They leased out the farm to a tree farming business for $572K per year for 15 years. Considering that the land use rights cost ETLT $6 million covering 25 years, that averages out to a cost of $240K per year. This means ETLT is making a profit by leasing the property out to the tree farm. So the land use rights deal in 2000 was not a bad thing.

The animal genetics business is still competing with Smithfield Foods from the US and Sumitomo Corp of Japan (the 2004 10-K mentioned them as well).

E-Sea has competition from General Electric and Siemens.

ETLT believes their animal business is in compliance with various new regulations from the WTO entry. But the rules are always changing.

E-Sea has a lot of regulation from the Chinese government and exports have regulations by other governments.

68 full-time employees, up from 26 last year.

The E-Sea facility is 120K sq ft. Monthly payments are $4.6K. Lease expires August 2007.

The Western Securities Corp legal proceeding is still outstanding.
The Company believes that this matter will be resolved during 2006 and that the Company will prevail on all counts.
The Bristol Investments legal proceeding was dismissed. Bristol re-filed the lawsuit with no changes.

Management's Discussion

ETLT won't be selling hay since there's now a ban on mowing the grasses.

Historically, nearly all revenue was in Q4 with the embryo sales. Q1, Q2, and Q3 in future years will have lamb meat sales, and embryo transplants into dairy cattle (which apparently can occur outside of Q4).

Land use rights are amortized straight-line over the estimated useful life or lease term. They're sending 4% through the income statement per year ($240K, which is only about half of the income the rights generate).

The whole derivatives accounting stuff is mentioned. They're revalued at the end of each quarter, with changes pushed through the income statement just to screw everything up. So when you have a good quarter, the stock price goes up, making the derivatives more valuable, causing the next quarter's results to be worse, causing the stock to decline, causing the derivatives to be less valuable, causing the next quarter's results to be better, causing the stock to go up, repeated forever in an endless loop.


Revenues up 36% ($6.2 million) due to...
Offset by a decrease of $3.7 million in sale of lamb meat, i.e. innocent baby sheep with weepy sad eyes
Offset by a decrease of $6K in sale of sheep embryos

Lower gross margins (32.1%) are due to mutton sales instead of lamb meat sales (2004 gross margins were 38.8%). Partially offset by the good feeling of slaughtering adult sheep rather than babies.

The higher depreciation is due to E-Sea.

SG&A is up due to a $212K increase in salaries (the top employee salaries were extremely low in 2004, around $20K), $439K increase in professional fees, other increases of $191K. These were slightly offset by other stuff.

The "other income (expense)" decreased by $330K due to the $245K derivative valuation change (vs a gain of $192K), an increase in interest expense of $28K, etc.

They claim capex really was $1.2 million.

Here's an irrational statement worth quoting:
Although the Company has a cash and cash equivalents balance of $18,224,488 and short-term investments of $9,909,084, management believes that the best return for such cash and short-term investments is in the People's Republic of China. Therefore, if the Company is to expand outside the PRC, as it anticipates doing, it will have to sell additional shares of its stock or borrow funds from third parties. However, because of the loosening of currency restrictions in the PRC, it can pay its non-PRC obligations from its funds held in China. Therefore, in the opinion of management, it has sufficient funds to carry out its business plans for the next twelve months.
Ok, so the best place to utilize the cash and short term investment is within PRC. However, the company will invest outside of PRC. Therefore it will need to sell shares or borrow money to do so. But wait! Because PRC is loosening currency restrictions, it can use the funds held in China, so it won't need to sell shares or borrow money. So everything is fine. The big news here is that the cash is not restricted to investments in China. So that net 65 cents per share of cash and short term investments looks a lot better, doesn't it?

Financial commitments are small.

The focus for 2006 will be...
If successful, these should increase revenues and profit margins.


Ham Langston Brezina, LLP
Houston, TX

I looked at these auditors in a previous post here.

They also audited:
Environmental Safeguards, going concern qualifier in 2003 for good reason, but not in 2002. There were no subsequent restatements of 10-Ks.

Amegy Bancorporation They audited the 11-K issued in 2005 and 2003 (wow, that's one better than a 10-K... actually it's typically an employee stock purchase plan), PWC did the 10-K for 2004, 2003, 2002.

Core Laboratories Again, the 11-K but PWC did the 10-K.

PetroSearch Energy They audited a recent prospectus, unqualified opinion despite massive losses and negative cash flow. Also the 10-K for 2005.

US Dataworks 10-K for 2005 and 2004 and a prospectus (incorporated by reference). The 10-K was amended to remove the going concern qualifier, because subsequent to the end of the year, the company got more funding (Notes 3 and 11). Ok, fine, but they burned up $4 million cash, current assets are only $2.4 million and they only raised less than a million to save the company.

There are others, like North American Technologies Group, FBO Air. They resigned from Endovasc in 2005 with 2 years of going concerns. They were auditors for Trans Max Technologies in 2004, going concern... later the company went bankrupt.

I don't get any bad vibes in the googling for these guys.

They don't show up in the list of biggest auditors.

Financial Statements

I already covered much of this above in the Q3 vs Q4 section.

Balance Sheet
Current Assets
Cash and equiv ******************
Short-term investments **********
Accounts Receivable *******
Inventories .
Prepayments etc. .
Total Current Assets ************************************

Advances to Distributors *
PP&E, net *******
Land Use Rights *****
Intangibles (E-Sea) *
Total Assets **************************************************

Current Liabilities
Notes Payable .
Accounts Payable etc. .
Amounts Due Related Parties .
Derivative Liabilities .
Total Current Liabilities **

Equity ************************************************

Income Statement
Sales                      **********************************************
Cost of Sales *******************************
SG&A *****
Depreciation and Amort. ***
Net Income ********

Cash Flow Statement

Net Income ********
Depreciation +++
Derivative Valuation Adjust +
Stock Issuances +
Inventories +
Accounts Receivable ----------
Accounts Payable -
Misc -
Net cash provided by ops .

Short Term Investment --------------------
Capex --
Purchase of E-Sea --
Sale of Patent +

Sale of Stock ++
Capital Contributed +

Net Decrease in Cash <--------------->

The numbers in the cash flow from investing activities don't add up. If you add the individual entries up, you'll see the result understates the cash used by $63,473.

The cash flow from finance activities shows $1,000,000 proceeds from the sale of stock along with $410,399 capital contributed. The equity statement shows $1,200,000 from "Common stock issued for cash and as compensation to employees". They issued 2.5 million shares (options which seem to have vested immediately) supposedly at 40 cents per share (which would have raised $1,000,000). These probably would have been exercised in cashless transactions in late 2005, which would explain the stock drop during that time. I'd label this corporate abuse.

The "Reclassification of unregistered common stock to paid-in capital" resulted in an increase in equity of $563,991 and an increase in shares of 790,827. This is part of the restatement in Note 20. This all pisses me off because it's extremely difficult to follow. It doesn't help me as a shareholder because it creates an area where bad stuff can hide.


Essentially identical to prior year

Identical to prior year

Details of the actual bank account holding the cash removed.

Still no allowance for doubtful accounts
: I'm more bothered by the reason stated than the fact that the allowance is zero.
No allowance for doubtful accounts has been established, as management believes all amounts are collectible.
The Fardo principle states that management will always think things are wonderful. GAAP allows for two methods of determining a valuation allowance. The first is using a percentage of sales based on the historic ratio of bad debts and credit sales. The other method is "aging the accounts" and assigns different percentages to debt of various ages. Neither of these relies on a simple guess of what management believes.

I would have expected at least some rationale why management believes that all debt will be collected.

The depreciation schedule has been stated in terms of years to fully depreciate rather than percentage to depreciate in any given year (it's all straight-line).

Land Lease Rights:
Changed "Land lease rights in Mainland China were stated...." to "land lease rights in were stated...." Oops!
I was correct that the amortization expense was slightly different from last year.

Added some boilerplate on intangible assets (which arrived with the E-Sea acquisition).

Added some boilerplate about currency exchange and the income statement. Also the new floating exchange rate.

Changed "In accordance with Staff Accounting Bulletin No. 104 (SAB 104), revenue...." to "In accordance with Staff Accounting Bulletin No. 104, revenue...." You wonder how much additional delay in filing was caused by little things like that.

A new advertising statement was added: indirect advertising costs are charged to operations the first time the advertising takes place. I know this is correct because I looked it up for CXTI just recently. However, the cost is not significant.

A section was added for derivative financial instruments since they now need to jump through hoops for the toxic convertables (as well as regular options and warrants). Pretty much any weird financial instrument needs to be split into its basic component parts which are looked at individually.

Any agreements which can impose penalties (such as stock warrants with a penalty for failing to register underlying common stock by a defined date) can cause the financial instrument to be accounted for as a derivative, even if it wouldn't have been otherwise. Same thing if the company can't control the embedded conversion or exercise of options (if I understand correctly, that's pretty much always).

If proceeds from the derivatives are less than the initial fair value of the derivatives, then the difference is charged to income.

Derivatives are fair-valued on the balance sheet for every reporting period. Additional costs due to adding derivatives to otherwise normal debt/equity is amortized over the life of the derivative (what about cases where the life is unknown?) as it trickles through the income statement. And these things need to be re-assessed at the end of every reporting period to see if they've morphed into some other animal.

Derivatives are classified as current or non-current based on obvious criteria.

ETLT uses Black-Scholes pricing.

People, this is what happens when accountants rule the world. Everything gets over-analyzed and bifurcated to maximize the profits of accountants. They won't admit that this is happening, just as any dictator believes they're doing the right thing ("Ah, now I can change everything the way it ought to be!").

The revised version of SFAS No. 123, SFAS No. 123(R), will kick in starting in Q1 2006. This makes share based payment even more complicated, causing accountants everywhere to do even more finely tuned accounting and get more money for it to boot. Probably the worst part of it is that any share based payment where services weren't completely rendered before Jan 1, 2006 will get really complicated.

NOTE 4: Inventory
This year we get a breakdown of inventory.

Sheep and cows are gone now (they were $231K of inventory in prior year). [They aren't gone, see Note 6]
Sheep and cow embryos are almost all gone, too (they were $364K of inventory in prior year).
Other raw materials increased to $122K (from $26K)

If I didn't read that ETLT is predicting a better year for 2006, I'd be a bit worried here. The amount of inventory at the end of Q1 will be very important, as will the actual revenues and profits for Q1.

However, if we go back and look at the 2004 10-K, we see that there is a lot of volatility in inventory. At the end of 2003, sheep and cows were only $76K while they increased to $231K in 2004. Of course sheep and cow embryos were $1.1 million in 2003.

NOTE 5: Property Held for Sale and Impairment
I'm hoping they aren't holding any property for the purpose of impairment.
No change from prior year.

They added $41K of office equipment in the US.

Aha! Here are the cows. So this means ETLT is saying that these cows are not held for sale but rather they're equipment. I guess this makes sense because these are crappy cows to be used to implant and give birth to better cows based on imported embryos from the US. I recall that they can do roughly 10 embryo implants per cow before the cow gets presumably all worn out. So I would guess there's a 10% depreciation of the cow per embryo?

Otherwise, the PP&E looks about the same as the prior year, with presumably about $900K added due to the E-Sea acquisition. It's not clear.

NOTE 7: Intangible Assets
This is $1.3 million for a patented dialysis technology (apparently from E-Sea) with very little depreciation.

NOTE 8: Notes Payable
Unchanged from prior year.

NOTE 9: Stock Options Etc.
Oct 6, 2004 stock plan: max 1.3 million shares. 1.29 issued (40 cents)
July 27, 2004 option plan: max 500K shares. None granted
Sept 20, 2005 stock plan: max 560K shares. All have been issued.
Sept 20, 2005 option plan: max 2.5 million shares. All have been issued. But page 43 shows they haven't been issued. And the equity statement shows that they've been issued, raising $1.2 million. The cash flow statements shows it, too, but with a different amount raised?

NOTE 10: Taxes
The only real difference is that the agricultural tax is gone.
Also E-Sea will be taxed at 15% ($70K so far).

NOTE 11: PR Agreements
No change. What about Heron?

NOTE 12: Concentration of Credit Risks
No change.

NOTE 13: Fair Value Stuff
No change. Boilerplate stuff.

NOTE 14: Stock, Warrants, Convertables
Stock sold in 2003 with warrants and agreement penalties. Warrants have a ratchet price, making the number of shares indeterminate. This stuff becomes derivatives with all the associated headaches.

Registration rights penalties through May 24, 2005 were settled by issuing convertables. The treatment of all this stuff is treated like mezzanine financing (see ACAS and ALD for mezzanine details).

Finders' fees and agent fees have registration rights and ratchet prices (not quite as bad as toxic convertables), making them derivatives which will convert into equity eventually. The exercise price of warrants were reduced from $1.54 down to 40 cents back in 2004.

May 24, 2005, convertables were issued to settle registration rights and penalties due. Most of these notes have already been converted, with a balance of $113K fair value. These are toxic convertables apparently with limitations (manditory conversion on certain price and volume criteria).

The sooner these things are gone, the better.

NOTE 15: Operations Concentration
The usual PRC issues.

NOTE 16: Related Party Stuff
The amount due Ji Jun Wu has decreased to $51K (from $106K).
No related party transactions in 2005!

Note 17: Major Customers and Suppliers
There is substantial concentration of suppliers, but the amounts change significantly every year. Same thing for customers. I'm not too terribly worried about it except to note that the business is going to be "lumpy" in the Buffett sense. Results from any given quarter (or even any given year) are not going to be all that representative, which makes it much harder to value the business.

NOTE 18: E-Sea Acquisition
ETLT bought the assets of E-Sea, including the dialysis patent (which I consider worthless).
Price was 5.7 million shares plus $8.5 million.

Assets of E-Sea at the time of purchase:
Cash: $1.5 million
Misc Current: $551K
PP&E, net: $529K
Intangible: $1.6 million
Misc nonCurrent: $519K

Current (and total) Liabilities: $89K

They bought it for exactly book value.

If E-Sea had been owned for the full year, ETLT's net income would have been $6.0 million (vs $4.1 million).

NOTE 19: Commitments, Contingencies
One legal proceeding (the Western Securities proceeding from prior year). Outcome should not be material as the expected liabilities are already recorded.

The old R&D contract with Towering International Trade Corp ("Towering Inferno") fell off the map and is gone now.

The penalties for not registering shares back in 2003 is still on the balance sheet as a liability ($277K).

NOTE 20: Restatement of 2004
This added a $318K current liability to the balance sheet.
Additional paid-in capital was decreased by $1.6 million while retained earnings were increased by $687K, resulting in a decrease in equity of $882K. (stock par value was changed slightly)
A gain of $192K was added to 2004 income, resulting in a slightly higher net income for the year.

The quarterlies were also changed.

NOTE 21: Non-cash investing and financing
In 2004, they had issued stock for notes payable and received inventory in exchange for property held for sale. In 2005, there was just the convertable notes converted into stock. Plus stock used in the purchase of E-Sea.

NOTE 22: Segments
Removing corporate overhead, ETLT's core business has operating margins of 21%. E-Sea had operating margins of 37%.

Auditor Changes

ETLT dismissed Thomas Leger on July 12, 2005 based on unspecified recommendations from the board, presumably due to the troubles in acquiring E-Sea.

All the usual stuff follows. The new auditors were engaged on July 8, 2005.

Controls and Procedure

Thomas Leger reported two weaknesses in ETLT.
  1. The screw-ups surrounding the initial attempt to acquire E-Sea showed weaknesses in controls over closing procedures and accounting for non-routine transactions.
  2. ETLT had to re-state 2002 to reflect merger costs correctly.
Management has supposedly taken corrective action regarding these weaknesses.

Ham Langston Brezina reported two weaknesses in ETLT.
  1. Lacked expertise to account for non-routine transactions.ETLT had to re-state 2004 for accounting for derivatives.
  2. ETLT probably needs additional steps to fix the underlying problem.

Executives and Directors

Jijun Wu 69 Chairman of the Board of Directors (owns 4.4% of stock, including options)
Jiansheng Wei 53 President, Chief Executive Officer and Director (owns $1.6%, incl options)
Shien Zhu 49 Director
Genchang Li 66 Director
Shicheng Fu 42 Director
Rui Zhai 38 Secretary
Zheng Shen 38 Chief Financial Officer

CFO is new. PhD in management (accounting and auditing) from Tianjin University of Finance and Economics (founded 40 years ago), also a professor there. Held positions in an unspecified Chinese accounting firm. Worked at two unspecified companies.

The secretary is new. B.A. in computer science. Was head of ETLT's US office since Feb 2005. Was a system analyst for EB Electronic Engineering Company. No apparent reason for being involved in ETLT. $60K salary.

Directors now gone:
Tielian Liu: Appointed to the board briefly on the first E-Sea acquisition attempt. No surprise that this director is gone.
Xingfa Xu: Independent director.
James Wang: Independent director.
The salary for the Chairman (not CEO), increased to $100K from $20K plus the usual 80K shares of stock.

Shareholders approved the 2005 stock option plan (2.5 million shares) in August 2005.

5,536,442 options outstanding with 1,882,053 which can still be granted.

Audit fees: $144K (vs $142K for 2004), both Leger and Brezina
Audit related fees: $13K (vs $39K for 2004), both Leger and Brezina
No other fees

Big Picture Stuff

Ok, so taking a step back and seeing the big picture...

I can't believe audited results include a cash flow statement where the numbers literally don't add up.

The company has gone on a stock option rampage like nothing I've seen before. Plus insiders dumped a huge amount of stock. Why is the strike price 40 cents when it doesn't seem like there was a closing price that low between Oct 1 and Nov 14 when most, if not all, of those options granted, vested, and exercised (based on the share count of 39,583,407 listed in the Q3 report vs 39,854,026 reported for Dec 31, 2005 in the 10-K)? Because the 10-K lists 37 cents as the lowest price in Q4 and they wanted to use a round number?

I don't understand why there's a $200K discrepency between cash flow from investing activities, the equity statement, and various details.

As others have pointed out here, the pro forma results for the full year for E-Sea include the bogus net income that includes contributed capital. Worse yet: this didn't get cleaned up by the audit.

I don't like the lack of detail on the short term investment.

I'm glad to see how the gigantic Wulugai ranch worked out. It was one of many worries. Hay sales from the farm have ended, but they don't seem to be much.

I'd like to have a better understanding of the future cattle embryo project. I don't like the fact that the company is claiming that the returns from the project will be surprisingly low (covered in an earlier post). The operations tend to be lumpy and largely non-recurring/opportunistic?

What I like about E-Sea is that it helps provide a lower bound on what the business is worth.

The cash is apparently no longer restricted, but the company made that bizarre irrational statement about the US investment.

I've decided to sell all of my shares of ETLT. That was a difficult decision because the stock is arguably very cheap and there's an enormous amount of bad news already priced into it. But I just don't feel comfortable owning this stock.

Unrelated Stuff

Here's an interesting discussion of ETLT at Investment Analysis Group at the Stern School of Business at NYU. I found that they covered pretty much every issue I've had with ETLT. The guy arguing against ETLT is particularly good. It's troubling to see that kids in a non-professional investment club are able to ferret out all of the pros and cons that I've found in a tiny, obscure company halfway around the world. This means any advantage I would have over them would be due to making better decisions based on the same information. The discussion begins at around 30 minutes.

UPDATE same day:
The auditors got back to me on my two questions.

  1. The final edgarized version picked up the incorrect total. The amount should be (11,623,919).

  2. The $200,000 difference is a non-cash charge for the difference in what the employees paid versus the market value of the stock on the date of issuance.
They're contacting legal counsel and EDGAR service to address the first point.

Also I fixed the video discussion link. You should watch it. It's great (but long).

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