Pink Sheets

ETLT (combined links) on the news section of their website, just added a new entry. There's no press release about this stuff, just a website update.

Title: "Adjusting Direction of Business, Exploring and Expanding Fields of Development"

Hopefully the key word is "exploring" here. This is a lot of strange, unrelated stuff.

They go into detail about the huge demand for tortoise products in China (which I knew about already).

The tortoise breeding industry in China is still at its early developing stage and some Types of tortoises (such as alligator tortoise, stone shell tortoise and coin shell tortoise) breeding are at high profit stage.

Now here's the key part:

The tortoise farms we are going to purchase are located in Hunan and Hainan respectively. The farm in Hunan has sound and complete incubating room, breeding room, breeding pond and water sewage and purification systems. The farm in Hainan does not need incubating room [this makes sense given its climate] and thus saves cost and makes it more possible to go for larger scale development of good breed culturing. The mode of production for mature tortoises is “company plus farmers”, i.e. the tortoise farm will be responsible for providing upgrading of breeds, culturing of breeds, eggs laying, incubating, supply of tortoise breeds and technical guidance. The farmers will culture the breeds into mature tortoises and company will buy all of them at protected price and supply commodity tortoises to the market.

So let me get this straight: you're going to buy the farm, and then buy the tortoises from the farm at a "protected" price. Who's being protected here, the farmers or ETLT?

Taking stone shell tortoise for example, the purchasing price at the seller’s door is 560 Yuan RMB per Kg. The average weight of each tortoise is 1100 grams. Each sells for 616 Yuan RMB and each young breed cost 120 Yuan RMB. Taking away the cost, the profit for each tortoise is 400 Yuan RMB, so breeding of 2500 tortoises will yield 1 Million Yuan RMB in profit.

Will the price remain stable?
What are competitors doing?
What are the costs that competitors are experiencing?
Who pays the capex costs?
I have lots of questions on this.

Mangoes were introduced to China during the Tang Dynasty (long time ago) and is well established by now. I like this sentence:

China has planted mangos in southern Taiwan provinces....

Don't give them any of that "RoC" crap.

Each kilograms of Australian mango can be sold for over 60 Yuan RMB during the Chinese new year in Beijing [they mentioned Hainan early mangoes and the association with Chinese New Year with mangoes], and even 1 kilograms of gold mango can be sold for over 50 Yuan RMB. The output of mango per mu in our plantation can yield over 6400 kilograms and these are high return products. The market margin and potential for the supply of Hainan mango all over the country is considerable.

Specialty breeding and specialty planting must stress “special” environment and “special” kinds. Natural environment can not be substituted. Even if man-made environment is successful, it has too high cost and can not compete with natural environment. Special and good kinds require profound know-how and economic strength as the basis. This is the starting point why we choose specialty breeding and specialty planting.

It makes sense that the path toward making/keeping profitability is in the specialty areas and not just brute comodities. But then they follow it up with some weird stuff like this:

The second great leap is: with Yihai as breakthrough point, we have developed more scientific content electronic information products for civil use that have infinite market potential, short production cycle, fast upgrading capability and high return on investment.

I think that was supposed to go with the next section...

While they're doing the mango thing, they might as well throw in a consumer electronics bleeding edge device. This is the part that makes the least sense to me.

Basically, the digital display technology has been producing extremely small screens with high resolution (this has been going on for years, actually). If you take two of these basic building blocks, hook them up to a pair of eyeglass frames, and perhaps do some image processing to counteract weirdness that your eyes might perceive, then you essentially have a personal viewer. Eventually this stuff will be in 3-D.

This product is bound to be popular all over the world in a few years, and now it is the best time to enter into this field. Our company will provide these video program view selection units on transportation systems such as trains, vessels and long distance buses for viewer to select the programs they like for viewing and entertaining themselves. In China over 2 billion people travel by train each year, and the market for this unit can be expected. Considerable revenue can be obtained based on 0.5-dollar charge for 1 hour of use!

I can't help but think that if Bus Uncle had one of these, he never would have put on such a, now popular, show. My far-sighted prediction is that most cultural phenomenon will originate in China/India/Japan/Korea, circulate among the 2+ billion people there, and hardly anyone in the "West" will even know about it.

We have reached purchasing letter of intent with the company that researched and developed this product, and we are conducting commercial negotiations with the company. Official documents will be sighed in the near future. Once the purchase is successful, we will increase investment, go for large scale production and occupy the market quickly.

And then Toshiba/Sony/Etc. will come out with a real consumer electronics version and ETLT's product will be forgotten. Let's be serious here, the consumer electronics industry is big, complex, and already dominated by a giants. Maybe, just maybe, there's a chance that ETLT could strike the bullseye and win big. Yeah, and maybe I'm a Chinese jet pilot.

But it sounds to me like one of those things where you order some parts from Company A, order some eyeglass parts from Company B, hire a few engineers to make it all work, then use contract manufacturing to produce a few thousand and see if it takes off. If that's true, then it's a pretty low risk thing with a small chance of high reward.

The mango thing is probably not a bad idea. I have no idea about the tortoise thing, hopefully it's not a large investment. The microdisplay thing seems like a bad idea to me. If E-Sea hadn't been such a wonderful deal, I'd have real problems with all this stuff.

What I really want is a CEO who is always looking for ways to make money, yet has a good filter for picking only stuff that has a high chance of success. We seem to have the first part covered. I'm hoping E-Sea wasn't a fluke. The reasoning given for the mangos and tortoises seems to be thinking along the right lines.

I continue to own the stock.

(links to all my ETLT posts on this blog)

After looking at ETLT's Q2 results, I didn't really catch this until yesterday. I missed what might be considered the most important thing about this 10-Q!

Let's go back to Q3 2005. In an amended filing, ETLT had to change some numbers because they didn't even add up correctly in the original 10-Q (current assets for the prior year were off by 2 dollars). Not only that, but they used a minus sign instead of parentheses at one point. Also total liabilities and stockholders' equity was off by 1 dollar (again, the numbers didn't even add up). Basic and diluted share count was wrong at one point. Plus all sorts of other errors. I had mentioned that after looking at perhaps 20 different Chinese reverse mergers, this seemed to be a very common problem among them. I bailed out of another Chinese reverse merger, YaSheng Group (YHGG), because they had errors showing cash disappearing.

There were all sorts of delays in getting the 10-K finished. ETLT was extremely late in filing it. And when the 10-K was finished and I went through it, there were enough big issues that I bailed out of ETLT! There were big red flags: numbers didn't seem to add up, big issues weren't explained, conflicting information within the report, not to mention the totally screwed up E-Sea accounting.

Next there was the Q1 10-Q report, which was late, but not as late as the 10-K. One of the things that I started noticing at that point was that ETLT seemed to be working hard at cleaning up their accounting act, which was a mess. By this time, I had cleared up pretty much all of the red flags and I bought back into the stock. The accounting in the Q1 report was significantly cleaned up and it hasn't been amended (yet!).

When I looked at the newly released Q2 10-Q report, I found no issues. The numbers added up correctly and compared correctly to prior reports. There was no forehead smacking, no big red flags. This was a normal report. It was a bit late, but not much worse than a lot of other tiny companies.

So why should this be a big deal? Because the reason why the stock is in the toilet is because of all those horrible things: numbers not adding up, stuff having to be constantly fixed, reports coming in so late that ETLT became ETLTE. We've seen those things slowly getting fixed and finally here is a clean report!

That's the big thing that I missed.

The August 2006 short interest is published today after 4:00 PM EDT. It seems OTC BB results show up before the Pink Sheets, here's the link. Here are the number of shares shorted for selected stocks:

ETLT: 3,916 shares (up from last month's 1,374, but still insignificant)
CXTI: 134,395 (up slightly from last month's 134,281)
EPLN: 219 shares (up from 10 shares last month, but almost zero)
BKBO: 2,831 (down from last month's 5,810, but still insignificant)

Eternal Technologies, ETLT (combined links) filed their Q2 10-Q report today.

Period ending June 30, 2006.
40,567,300 shares on Aug 20, 2006 (still unchanged since March 31, 2006)


Balance Sheet:
Cash just keeps increasing. $18 million in Dec to $23 million in March to $27 million in June.
Short term investments still around $10 million.
Accounts Receivable plunged to under $1 million from $3.5 million in March and $7.1 million in December. Great!
Inventories down slightly. Good.

Real net cash (plus short term investments) is over $35 million, over 85 cents per share (although it's restricted, see here). Considering that total assets are only $53 million, that says a lot about the company being largely cash right now.


Income Statement:
Revenues are up slightly (but expect a lot of lumpiness in the business). Gross margins overall seem roughly about the same.

The gross profit margin from cattle embryo transfers was 27%, gross profit margin from sheepembryo transfers was 8.3%, the gross profit margin from the sale of roll muttonwas 19.7% and on the gross margin on the sale of E-Sea products was 55.5%.

They didn't break this out in Q1. I should go back and check earlier results. Net margin was around 16% vs 19% in 2005. And this is with other income (vs other expense last year). E-Sea had some taxes.

Depreciation expense is up due to E-Sea, so is SG&A. The real revenue/income story is in the segment information in Note 8. Agriculture revenues dropped from $10.4 million in 2005 to $8.9 million in 2006 with operating margins dropping from 21% to 16%. When you look at the detailed explanation, it's pretty much lumpy operations as it's always been, which is ok. E-Sea (which wasn't part of the company in Q2 2005) added $1.5 million in revenue with operating margins of 47%. E-Sea had an operating return on assets of 11% while Agriculture had a return on assets of probably around 10%, both good.

The income statement is not glorious, but it doesn't need to be. It simply needs to be adequate considering that the enterprise value of the operations are currently negative (i.e. the stock market thinks the company is worth less than nothing) or else it's hugely bearish on Chinese currency, which seems unlikely considering the prevailing views.


Cash Flow Statement:
Here's where the results look great. With a net income of $2.2 million for 6 months, operations produced $8.6 million in cash thanks mostly to a huge $6.2 million decrease in accounts receivable (it's really just the timing of collections). Depreciation was $531K.

$250K was advanced to distributers as cash burned via investing.

No financing activity.

Expansion in the US will require raising dollars via debt or selling shares.


NOTES: (not covered above)
$52K worth of stock was issued to convert debt.
Not surprisingly, salaries expenses are up.

$117K of the net income is due to a beneficial change in the value of derivatives on the balance sheet (convertibles). ETLT has a small amount of these. If the stock price goes up a great deal, this will change into a significant expense and make the future results look worse. It's not as severe as CXTI, fortunately.


CONCLUSION:
I'd say the results are reasonably good. No surprises. I continue to own the stock.

UPDATE August 24, 2006 evening:
Infinite loop. The news list on Yahoo Finance shows Thursday's Daily Blog Watch which contains a link to this post which caused a huge jump in the amount of traffic here (looks to end up being about 500 visitors today).

UPDATE August 26, 2006:
I just posted an entry called The Big Thing I Missed in the 10-Q. (pssst, it's a good thing)

Strathmore Minerals (collected entries) announced a new staked claim in Grants Pass, NM.

According to the New Mexico Geological Society Guidebook 54 (Uranium Resources in the San Jaun Basin, New Mexico, in Geology of the Zuni Plateau by V.T. McLemore and W.L. Chenoweth, 2003, pp. 165-178), previous exploration conducted by Utah International and related companies defined a drill-indicated resource of 5 million pounds U3O8 grading 0.12%. In addition, the Company is in possession of historic drill-hole gamma logs for the Dalton Pass Project. The calculation of a new NI 43-101 compliant resource estimate for the project is forthcoming.

If we assume that this remains the same, then based on my uranium estimate assumptions, the extractable uranium would be around 3 million pounds at a cost of around $30 per pound (just based on the concentration alone, not on depth or ISL possibility). If the yellowcake sells for the current spot price of 47.25, that results in around $52 million gross. I'm assuming they'll need to give up half of that in perhaps a joint venture to mine the stuff, which would result in a bottom line addition of $26 million. I'm currently assuming 100 million shares totally diluted. So this adds 26 cents to the value of the stock less discounting for time. Let's call it 17 US cents.

Also, they staked 26 new claims in the Church Rock area of NM... it's on Federal land. This was based on poring over their Kerr-McGee database (purchased 2004 along with Church Rock and Roca Honda). Looks perhaps OK, with potential low concentration (bad) resources within sandstone (good for cheap and environmentally friendly ISL mining). The low concentration stuff becomes valuable if uranium prices continue going up a lot more as the higher cost of extraction is more than overcome by the high selling prices.

UPDATE, next day:
The spot price of uranium jumped another 75 cents to $48.00. A 75 cent increase in the price of uranium would increase my estimate of the value of Strathmore by about another 15 cents.

CXTI

Q2 period ending June 31, 2006 (also checking against Q1 period ending March 31, 2006):
28 million shares on June 30, 2006.

Wow, cash is way up. But so is accounts receivable ($15 million to $18 million and now $25 million). Where did the $6 million in cash come from?

Prepayments are down by about $4 million. Ok.

Total assets are up to around $50 million (was $41 million in Q1).

An officer loaned an additional $500K to the company. PRC tax payable is down somewhat (which would eat cash). The convertibles are valued now at $1.7 million, the embedded derivatives are carried at around $4 million and the warrants are carried at $9.4 million, all higher.

Additional paid-in capital increased by $1.1 million, probably convertibles and/or warrants flushing through the system.

Retained earnings up $2 million, which is fine.

Revenues are $14 million vs $15.1 million in Q1. Timing of revenue is obviously going to be somewhat lumpy.

Gross margins are unchanged at around 52%, which is good. The advertising expense in back to normal after the huge expense in Q1. G&A expenses are $833K vs $2 million for Q1. So as expected from those numbers, operating income is double the Q1 amount. However, more than half of that is eaten up by the change in fair value of derivatives (the accounting for the toxic convertibles etc). Interest and finance costs were huge at $1.2 million.

Net income shows up as only $281K vs $1.7 million in Q1. Trying to accurately understand what's going on in the business is not easy. I don't like the accounting for toxic convertibles and warrants, but I don't have a better alternative, really (I just guess at a reasonable upper bound on net dilution). Cash flow from operations for THREE months was around $5.5 million... and that's after about a $7 million increase in accounts receivable! So even with a huge increase in promises as income, operations still generated a lot of cash. The real cause of the big difference between cash generated and accounting income was due to the changes in fair value of derivatives and non-cash interest/finance costs. Also, a lot of the "costs and estimated earnings in excess of billings" was converted into cash in Q2.

Capex is tiny, but then so is depreciation. In spite of being a cash intensive business, they aren't really capital intensive in the sense of buying big amounts of equipment that sits around while they hope for revenue.

Financing was pretty much all advances from a former officer (and paying part of it back).

They issued some stock to settle some interest charges (125K shares).

800K shares were issued during Q1 as compensation to employees for services (market price ave was $2.09, for $1.7 million market priced cost). None issued in Q2.

The outstanding related party balances declined, which I consider good.

NOTE 7: The accounting for consultant fees paid with stock is interesting. After the stock is issued, as the stock price goes up, the accounting cost goes up. You know, I kind of like that method because I don't like using undervalued stock to pay for stuff and it should show up somewhere. But it causes an oscillation (which can be useful to make money). The stock price goes up, the costs go up and earnings go down. This causes the stock price to go down, causing the costs to go down, causing earnings to go up, causing the stock to go up, causing earnings to go down. Etc.

NOTE 9: More detail on the toxic convertibles. In November 2005, 2.3 million shares issued at a conversion price of 70 cents (that was the big plunge in stock price after Halloween).

They now have 2 debenture investors remaining.
July 11, 2006: 43K shares issued for accrued interest.

They're now up to 35 million diluted shares using their accounting. In looking at Q1 results, I had assumed 45 million. I may need to bump that up higher, I'm not sure right now. Assume 50 million for now.

Looking forward, they are building up cash. During the last 6 months, they were awarded 8 new contracts worth $114 million: Jinjiang (phase 4), Dehua (phases 3, 4), Nanan (phase 2), Licheng, Shishi, Yinzhou District Ningbo City, Dehua Unified Command System. They started training and maintenance services for Jinjiang.

12 outstanding contracts worth $126 million in revenue. They expect to sign more contracts during the second half of 2006.

The Company anticipates that the existing cash and cash equivalents on hand, together with the cash flows generated from the existing projects will be sufficient to meet the working capital requirements for the on-going projects and to sustain the business operations for the remainder of 2006. Regarding the convertible debentures to be matured in October 2006, the Company anticipates that the debentures will likely be converted into the Company’s common stock by the debenture holders. Otherwise, the Company will ensure that it has sufficient cash to pay off the debentures at maturity. In the event that the Company signs up and commences new contracts, additional financing may be required but there is no assurance that the Company will be able to obtain such additional financing, or on acceptable terms to it.

That's it for now. I might go back and look at this again soon. Overall, I'm happy with it and plan to continue to own the stock.

BakBone filed an 8-K amendment clarifying the accounting issues it's dealing with. It's worth reading, but just repeats the same stuff and says, in addition to 2004 and 2005, not to rely on financial statements from 2003, either, because they're also affected.

There's also an 8-K issued which includes the July 27 open letter to shareholders which I covered here.

It's easy to dismiss accounting issues and focus on increasing business and successes, but that's a recipe for disaster. These issues are important and could have significant impact on the value of the business. It reminds me of a section in the autobiography of John D. Rockefeller where Rockefeller is buying up oil refiners in the early days of the oil industry. He found that the refiners didn't have any grasp of how much money they were really making because they didn't understand a lot of accounting concepts. A lot of them were really losing money despite near term solid cash flow.

BakBone needs to get these issues sorted out in order to have a clear picture of what's going on within the business. That's a scary thing, but I'm invested just the same.

GSCP (sec) cute-FTP data transfer software client, expanding into server and other software areas. Revenues really jumped in 2005.

Revenues/Net Income
2001: $5.3 million / ($0.3 million)
2002: $5.3 million / ($0.5 million)
2003: $4.8 million / ($0.6 million), 75% CuteFTP
2004: $4.9 million / $0.2 million, 69% CuteFTP
2005: $6.7 million / $1.4 million, 51% CuteFTP

10-K/A: period ending Dec 31, 2005
14.3 million shares on Mar 6, 2006. 2.4 million options.

2/3 of revenues in the US, the rest is in Europe/Anglosphere. Software license and support. CuteFTP is shrinking as a percentage of total sales (good). Regular CuteFTP sales dropped 22%, while CuteFTP Pro increased 18%, the total for these increased by 1%. The FTP server and enterprise level enhanced file transfer stuff grew at 14%. There's also web content management software (PublishXML) and some other stuff. Feb 2005 they announced a vertical Enhanced FTP product for healthcare organizations.

Number of licenses sold decreased to 124K from 170K, but the ave license price jumped to $59 from $40 due to increased sales of higher end products (enhanced file transfer stuff for enterprises).

They use some open source software. I'm not sure if/how they deal with the GPL license issues.

Competition is harsh. R&D costs have been fairly flat over the years, increased in 2005 due to outsourcing to deal with lots of releases during the year. No customer concentration (none more than 2.7%).

41 full-time employees (up from 36, but down from 45 in 2003). Sales=10, Marketing=7, Mgmt/Admin=7, Customer Support=6, IS=5, R&D=4, QA=2. That's a little light on the QA side.

Fianncial results had to be restated (deferred revenue issue of some sort). Revenues/earnings dropped.

Balance sheet is very strong. Net cash of $1.7 million with total assets of $2.9 million (but keep in mind their burn rate is over $5 million per year, so this is like a 17 week cushion). PP&E (the usual office stuff) is almost totally depreciated.

21.6% net margin.

Cash flow from operations is hurt by AR and helped by defered revenue. Overall, free cash flow matches net income fairly closely over the last 2 years (it's better in 2003). Very little else going on with cash.

Q1 2006:
14.4 million shares on May 12, 2006. 2 million options.

Balance sheet: cash is up even more, but so is AR. Deferred revenue liability increased. Equity increased by over $600K. Net cash if $1.33 million.

Income statement: Revenues are way up: $2.4 million vs $1.4 million in the prior year's Q1. SG&A increased by $237K. R&D increased by $50K. Net income is $549K.

Cash flow from ops looks similar to 2005 full year above: hurt by AR increase, helped by deferred revenue, but in this case there's a $155K liability for taxes. I'd say free cash flow looks like about $426K.

CFO resigns! New CFO joins

Conclusion: This is a gamble on the future of this team and their products: present and future. I'd assume about 19 million totally diluted shares, which may be a bit optimistic. If the gamble is correct, the stock is worth a great deal. If the results going forward are mediocre, the stock is worth perhaps $1.30. Worst case is very bad, given the industry, but they do have something along the lines of 9 cents of net cash per share. The shares are selling for $2.95, which is a reasonable price.

I just wanted to document my opinion about ETLT's cash on hand. The cash is restricted to China, which to me is not as big a deal as some people make it out to be. I strongly suspect the restrictions will ease over time and while a direct conversion isn't possible, there's always a way (I was talking recently to an American working in China who knows a guy running a small business and that guy jumps through a lot of hoops, but manages to do it). If I own a company with a huge pile of cash, what happens if I sell that company to some business that needs Chinese cash? Or maybe I spin off a company that consists of nothing but Chinese renminbi and sell it for dollars. I get their dollars, they get my renminbi. I'm sure it's not quite as simple as that (there are probably many issues), but I can think of a lot of worse places to have my cash locked up than a country with 1.2 billion people and an economy growing at 10% per year.

In my opinion, the reason to discount the cash is not because of the restrictions on currency exchange but because where it's going to end up. The company has stated that the cash will be used to fund a business venture that will return what appears to be only about 5% per year on the investment. The plans of ETLT would be at least as difficult to overcome as the Chinese restrictions, and the result is far worse. However, I still believe ETLT is a good investment at forty something cents. Just add up the expected future earnings.

Give me a million dollars worth of restricted renminbi and I guarantee you that I'd get a reasonable return on it after some work, and I could probably manage to get the return in dollars. For example, I could go over to Shanghai and set up a java software development outsourcing business and I'd get plenty of US dollars while the restricted cash slowly goes into the pockets of Chinese software developers.

UPDATE 8/4/06:
Someone on the Raging Bull message board for ETLT brought up a good point. The Chinese cash can't be used to bail out the US part of the business that will be starting up soon. While this is a good point, I don't think the business will be heavily invested within the US. But if they do need to raise dollars, it could be fairly dilutive if the stock continues to get no respect. I still think the stock is worth a great deal more than the current price.

...and the crowd goes wild!

ETLT: pink sheets, yahoo, sec, website, list of links

Over on the Raging Bull message board for ETLT, it seems that ETLT's investor relations people finally got a pulse. Most of what you read there should be ignored or taken with sodium chloride granules. But in this case, multiple people indicated Heron finally responded (and the two people don't seem like sock puppets... well, even if they are, it doesn't matter, I'm not buying or selling).

psi_club reports that they said they can't do or say much without authorization from ETLT. That makes sense. Heron received an update for the ETLT website, but it needs to be professionally translated.

dart39va reports that Kathy at Heron said they expect a PR in the next 2 weeks. Partly about mangos. Also some "new electrical program" [oh geez!].

Apparently, that was enough to drive the stock up over 13%. But that's mostly an indication of how low it had gotten.

In other news, no change in the uranium spot price. Still $47.25 per pound of yellowcake. And PPL Corp has applied for production expansion of its Susquehanna nuclear plant.

News articles covering the same announcement here and here.

"In the past, the summers have traditionally been very slow and usually there's little movement in the spot price. This summer, the tight supply situation continues to push the spot price higher, notwithstanding the moderate levels in demand," said George Assie, Cameco's senior vice-president for marketing and business development.

And also:

"We now expect total 2006 spot volume to be at or above the high end of the 20-to 25-million-pound range we had forecast," Assie said.

There was talk that the 2005 jump in prices was due to temporary speculation. 35 million pounds exchanged in 2005 on the spot market. UxC wrote some interesting stuff about that on their website (which is also where you find the spot prices). They concluded that roughly 10 million pounds exchanged on the spot market in 2005 were investors/funds and that even if you back that amount out, you still end up with a huge 25 million pounds, which would still be a 10-year volume record.

The spot market for uranium is extremely small, with only 107 transactions in 2005, and a lot of that was in a flurry in the early part of the year. The only point of following the spot market is to get a sense of where the much larger term contract market is heading: it has even fewer transactions, but much larger amounts of uranium.

In Cameco's quarterly results, their uranium earnings actually decreased from last year due to increased costs and an 18% decline in deliveries. They were helped by the increasing spot price and by currency translation changes and they had some increases in fixed price contracts (presumably due to new contracts). How sad that makes me, knowing that Cameco has shipped less uranium. As they look ahead to the full year:

In the uranium business, we expect revenue to be about 15% higher due to a stronger realized price, partially offset by a decrease in sales volumes.

All I ask is more of the same.