Friday, May 26, 2006
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:
UPDATE 12:45 PM same day:
Well, I bought back in, averaging between 53 and 54 cents.
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.
FIRST QUARTER RESULTS
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.
// posted by Bruce @ 6:24 AM 
