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Saturday, April 28, 2007

Conforce International (CFRI) conference call

Conforce International combined links.

Marino Kulas, CEO
Joseph DeRose, VP of Product Development

CEO started it up.
CFRI has seemed somewhat silent about upcoming news, but activity of Conforce is at an all-time high. Numerous discussions with customers regarding EKO-FLOR.

Also, CFRI is in development of three new products that will be disclosed "in the coming weeks." More applications for EKO-FLOR. Also management enhancements. Transitioning from development to global supplier.

Questions and Answers

The last few PRs have mentioned new products to be released. The December investor update said that CFRI would disclose these products in February and their launch schedules. When can we investors expect new information on these products.

Immediately after launching EKO-FLOR in December 2006, CFRI started exploring truck flooring as a 2nd major market. CFRI currently has a very high level of contact with trailer companies in North America and Europe. Will be releasing details in the next few weeks. Too early to explain more.

Also there are two additional markets for EKO-FLOR: one commercial, one retail. The retail market "holds a lot of excitement for us...."

How much of CFRI resources are needed to roll out an EKO-FLOR trial? Concerned about the financial strain and dilution. Will the existing terminal business be sufficient to roll out these other businesses.

CEO says: "The rollout will not cause financial strain to the company. The initial rollout is being financed by the terminal operations division. However, [if] the rampup becomes more significant, then additional financial resources are available to the company. I would not be concerned with shareholder dilution anytime in the near future."

Is EKO-FLOR currently generating revenue for the current quarter.

Not currently. Signficant revenue is predicted for fiscal Q3 and Q4 of 2007.

The most recent press release makes your 2007 and 2008 goals sound like we're back to square one. I thought the three phases of testing was already completed and the flooring was now moving into actual sales and marketing. Why are we back to a new round of testing.

[This person doesn't seem to have spent much time watching product development and rollout. There's a big difference between internal testing, industry certification, and customer testing.]

Phase 3 of testing ended in November 2006. The goal was to pass certification. After completing that certification, CFRI began a field trial phase. The goal is to rely on customers who can conduct actual field trials in actual usage conditions [I've found that most beta releases sent to customers are never even used at all]. A single cycle takes several months so these trials will require some time. Containers are complex and a change to a container requires a field trial phase [this is because changes to complex systems are always somewhat unpredictable, regardless of how well you understand them. I've heard all sorts of humorous "stories around the campfire" about all sorts of field failures. My favorite was a demo of a processor chip that, when the clock was stopped and the reset line asserted, the chip would actually catch fire. No matter how much you test something, the field will always throw something unexpected at you. A lot of the business history books in my reading list have examples of things going wrong].

What are the long term limitations on the percentage of overall container market share that EKO-FLOR can attain?

[this questioner is obviously brilliant]

Raw materials are produced in sufficiently large quantities. The factories are compact and energy efficient and can be located close to major markets and raw materials. There's no limit at all. [Really, this question was meant to determine what would be the limiting factor as you crank up market share toward 100%. I wouldn't expect raw materials or the production to be the limiting factor, but rather limits in the market itself: a limit on how many containers simply can't or won't likely use EKO-FLOR.]

What's to stop a larger company from creating their own EKO-FLOR-like product and stealing CFRI's market share?

The most obvious is the patent process. CFRI is currently engaged in this process [From my experience patents aren't always very effective at eliminating competition. Often a company can figure out a way around your patents]. Another is first-to-market advantage. The industry is small and won't bear more than 2-3 types of flooring [good to hear]. Also nondisclosure agreements with customers.

Does the Company know about any current efforts by other companies to develop other composite container floors?

There have been several attempts. Success has been limited by load problems. Also they've been based on oil-based raw materials. EKO-FLOR is significantly less dependent on petrolium. To the best of their knowledge, there is no commercial use of a composite floor at present and EKO-FLOR was the only one being shown and introduced at the Hamburg trade show.

What about bamboo flooring and what are the costs?

Bamboo has been around for years now and acceptance is about 1% market share. The selling prices are comparable to plywood. Cost isn't known. Bamboo is limited by available and capacity to manufacture. It's a cellulose product and has the same issues as plywood: prone to decay in the presence of water, porous material absorbs stains and odors, difficult to clean, requires treatment for microbes and insects and it's only partly effective. It doesn't survive the 12-13 year life expectancy of a container. EKO-FLOR eliminates all of these issues and is expected to last for the duration of the container's life.

Since certification, only Oceanex has been announced as a customer. IR said the product basically sells itself [remember, allocation!]. Concerned!

CFRI can't disclose much about this due to confidentiality and trade secrets. CFRI is working with a some of the largest companies in the world and there's a great deal of enthusiasm. So much so that they've had to fast track the highway trailer application due to a great deal of interest.

As simple as a container looks, it requires significant industry infrastructure changes to adopt a new product [this makes sense to me considering the people involved in putting stuff into containers and dealing with a new type of flooring, the methodology for this is surprisingly involved]. This is a crucial step and CFRI is involved with the customer. A typical sales cycle with the largest container companies are 6-8 months. The trailer sales cycle would be greatly accelerated. There will be announcements in the coming weeks.

What is the cost of EKO-FLOR in a 20ft or 40ft container.

Can't say too much, but EKO-FLOR will command a small up-front premium. CFRI can demonstrate that EKO-FLOR will actually save customers money over the service life and add performance and versatility to the fleet.

Will CFRI actually do the manufacturing?

CFRI will direct and control the production through well-established manufacturers [this is another example of where it helps a lot to have gone through that process in the real world, even if it's an unrelated product].

Any dilution in the near or far future?

There are no immediate plans for dilution. However, over 3 to 5 years, CFRI could do manufacturing for the retail application. If that requires funds, CFRI could do some sort of offering.

Has CFRI filed for the NASDAQ bulletin board listing?

The intent is to trade on the bulletin board by May 2007 based on required documentation. They expect to be delayed by 6-8 weeks.

Can the Company provide any details on the situation with the apitong plywood market? Any anecdotes about quality or price changes? Are there any clear long term trends in supply?

"...the best way I can describe the supply situation with apitong plywood is to use the word that is used within the industry, which is crisis. The market broadly knows that, at present, the availability of large diameter apitong logs has been drastically reduced. As a result, the very thin veneer that has to be cut from those logs in order to create the individual plys in the plywood has become smaller and they've become weaker. Overall, the availability of the apitong itself is very limited and that's force the use of inferior wood species in combination with the apitong. As a result, the prices for the plywood have moved higher while the product quality has actually weakened." Also the apitong plywood is not expected to survive even half of the 12-13 year life of a container. Also, logging is destroying the tropical forest environment.

What does this new flooring do that the old flooring didn't do? Why would a container manufacturer switch?

50 years ago, they adopted the tropical plywood. Today the supply and quality is diminished. People today have a better understanding of the harm caused by this particular type of logging. All of this supports the "crisis" word for the market.

EKO-FLOR is a stronger material. It's very consistent from day one on. It extends the life of a container. It can be reused and recycled at the end of life. CFRI is confident that EKO-FLOR will be more cost effective after just a few years of use.

It's been several months since the Hamburg conference and word is that the concept has not been well received. This is clear from the lack of substantial firm orders to date. Why has EKO-FLOR failed?

In addition to what's already been said, EKO-FLOR has been well received. The few independent media sources have said this. Similar, but different, industries are looking into EKO-FLOR. Details will be disclosed very soon. There has been enormous interest on various fronts. They've already taken action on some of these fronts.


If apitong is so bad and EKO-FLOR is so good, why does EKO-FLOR command a "small" premium and not a gigantic one?

No dilution for a normal rollout. That's good news, but it probably means a slow rampup.

They say the market will only bear 2-3 types of flooring, which makes some sense. People working with containers can't be expected to deal with a large variety of floors. I would suspect each would have different requirements and methodologies.

I continue to own the stock.

from an email I sent about investing

I've posted this here in case someone might find it useful.


The reason I don't like companies with massive liabilities and hardly any assets makes sense if you translate that into a real life analogy (it's very important in investing to be able to take a set of financial numbers and understand what that really means in the real business). Let's say someone has $50,000 in total credit card debt, they owe $10,000 on their car (which is only worth $12,000) and the sum total of everything else they own is less than $3,000. Their assets are $15,000 and their liabilities are probably more than $60,000. What sort of person gets into that situation? It's almost always bad news how they got there. Things aren't working for them. How much flexibility are they going to have? People like that often end up paying more for food, a home, and stuff because they don't have flexibility. They typically live paycheck-to-paycheck and can't take advantage of good situations when they occur. They can't invest in education and probably can't take risks in their employment.

You can imagine all sorts of scenarios involving what people have, what they owe, how much money they make, and when they get to take it home. The above situation changes entirely if they have a goose that lays golden eggs. In that case, you'll see big revenues and wonderful margins (i.e. the cost of the eggs is nearly zero). Their financial situation will very quickly


I refuse to advertise because of two reasons. The first is that I don't want to answer to advertising, either directly or indirectly. What would happen is that I would start to measure the number of page hits I get and I would unconsciously start adapting the blog to increase the advertising revenues which would be pointless considering that I make or lose far more money based on investment decisions.

The second reason is that the benefit I get from advertising (in dollars) is much less than the annoyance it would cause the readers. It has a negative producer/consumer surplus. It would reduce the value of the blog by more than the amount of money I might receive. While the readers would pay for it in the short term, in the long run the cost would come back to me in reduced readers (especially the readers I care about most: people who make sizable investment decisions).


Much of what I'm looking for when reading financial statements are patterns that signify something bad. There has been a lot of benefit to simply reading lots of reports for lots of companies. In fact, I believe that this is a major rule of life that the book Blink describes. Lots of experience combined with careful observation allows a thinking person to learn a great deal about complex systems.


Much of my investing is based on an intuitive understanding of how a business works. Consider sailing a boat. I learned to sail by sailing very small boats. I spent a lot of time figuring how the various forces on boats work both in theory and in practice. BOTH ARE VITAL! Theory without practice/exeperience doesn't give you a full understanding of any complex system. Practice/experience without theory causes the important things in experience to be lost. So with sailing, I got to a point where I could sail a small boat without a rudder simply by shifting the weight and forcing the center of drag to be horizontally offset from the center of effort of the wind. I wouldn't have been able to do that without both theory and practice (try going around in small circles that way).

I've spent a lot of time reading books about marketing, about business history, about various types of complex systems (everything from weather to the game of Go). So when I look at a business, I try to get an understanding of the forces that affect that business. When I bought a partner ownership in a gym, I knew the costs and revenues and I knew what would happen if more members were added (it would go profitable very quickly, as it already has). I knew that the new employee who I've known for many years would instinctively bring in new members (which has already happened). I also knew that the other partner would be an even keel to keep the business from going unstable (which has already been demonstrated to some extent).

Understand the system and how it will respond to various changes! Then try to understand what those changes will be in the future.

With investing there are three categories of companies:
1) good investments
2) bad investments (i.e. good short opportunities)
3) don't know

Almost all companies fall into the third category, even a large number of companies that will turn out to be good investments. It's important to adjust the filtering so that nothing bad goes into category 1. Even then, some will. That means you need to "know what you don't know".

Tuesday, April 24, 2007

BakBone Software (BKBO) deal with Sun

BakBone Software (combined links) issued an 8-K today along with the attached contract for warrants on BakBone stock.

Sun gets warrants for 4.4 million shares with a strike price of $1.78.

20% vests when Sun reports to BKBO that the "Base Technology" is available.
26.7% vests after Sun gets $5 million in revenues for BKBO through the deal and one year has passed.
26.7% vests after Sun gets $10 million in revenues for BKBO through the deal and two years have passed.
26.7% vests after Sun gets $15 million in revenues for BKBO through the deal and three years have passed.

Warrants expire after 10 years.

In a change of control, 25% of the warrants vest immediately. Also there's a conversion right whereby Sun gets an amount of BKBO shares equal to the current intrinsic value of the warrants (i.e. how much they're in the money).

If BKBO breaches the contract and it's not resolved, then all the warrants vest immediately.

BKBO's gross margins are very high, so based on this alone, the deal would be worth perhaps $12 million.

A reclassification of the stock (not including a change in par value of the stock), a split, or a merger will require rewriting the warrants to be substantially equivalent, if I understand correctly. Also, the strike price is reduced by any dividends paid out (not likely). Warrants are non-voting but receive the usual info distributions of common stock.

There are now 88.5 million fully diluted shares of BakBone Software (64.5 million shares, 5.6 million options, 18 million convertible preferred shares, 300K restricted stock units, 13K shares held by employee benefit trust, 80K warrants).

If the 4.4 million warrants are added to the 88.5 million fully diluted shares we get around 90 million fully diluted shares of BKBO (am I good, or what?)

UPDATE same day: The sole remaining child laborer wants to correct the record that they are not lazy, just busy with other work. Not only that, but the backlog of companies they've generated has grown quite a bit. So I'm the bottleneck. I stand corrected.

Thursday, April 19, 2007

Avantair (AACQ)

AACQ, Avantair, website, sec, yahoo, chart, Com ($0.0001)

This is absorbing, after a reverse merger, a fractional jet (actually turboprop) company along the same lines as Warren Buffett's Berkshire Hathaway's NetJets, but much, much smaller. Avantair is the fifth largest fractional aircraft company. That's a pretty lousy spot on the totem pole. Seems like it would be best if they define some niche to become dominant in rather than just being yet-another-fractional-jet company, especially against one backed by Berkshire.

Avantair is the exclusive fractional provider of the P-180 turboprop, small twin engine plane, composite materials, with a canard wing, which a lot of people might find odd looking. Speed of 458 mph. The plane's development started in 1982 but hit snags, Avanti ran out of money in 1994 and went nowhere until 1998. They have 25 planes with 58 on order.

273 employees.
Offices in Clearwater, FL

They did a reverse merger "IPO" Mar 2, 2005, offering 6 million units (one share, two warrants at $5). Another 900K units sold two days later. Units were sold for $6. Raised a net $37 million.

Press release about getting a Gold Rating from the Aviation Research Group US CHEQ System.
To receive a Gold Rating ARG/US evaluates data on the aircraft operated and the pilots employed. Operators who meet or exceed the established ARG/US standards for equipment, crew experience, and ratings are assigned the Gold Rating. The emphasis is not only age of aircraft, but also on modern avionics, progressive maintenance, and proven safety devices such as TCAD/TCAS, FMS, and TAWS/GPWS.
The 10-K just came out on April 6, 2007. Jumping quickly to the balance sheet.

Executives and Directors own 22% of the business, mostly Jonathan Auerbach of Hound Partners, NYC, Steven Santo, CEO, and Paul Sonkin of Hummingbird Value Fund (you never see names like "Turkey Vulture Fund").

Goldstein Golub Kessler auditors.

There are no operations yet as the merger hasn't actually completed. So the balance sheet mostly just shows the cash in a trust fund. No operations in the financial statements.
On October 2, 2006, we entered into a Stock Purchase Agreement with all of the current stockholders of Avantair, Inc. We are the surviving corporation in the merger and will change our name to “Avantair, Inc.” Avantair, a Nevada corporation, is engaged in the sale and management of fractional ownerships of professionally piloted aircraft for personal and business use. Avantair operates fixed flight based operations, aircraft maintenance, concierge services to customers from hangars and office locations in Clearwater, Florida, and Camarillo, California. Avantair is the fifth largest company in the North American fractional aircraft industry.
The 8-K from Oct 4, 2006 has the info on the fractional turboprop business.

Finacials are here.
Revenues were $7.7 million in 2004, $26.2 million in 2005, $49.2 million in 2006. They're running at a loss, which is no surprise given how stubborn NetJets was at reaching profitability. Losses were $5.0 million in 2004, $8.7 million in 2005, $20.7 million in 2006.

Current assets are $14.8 million, most than half is some property held for sale.
Planes are $100 million depreciated to a net $68 million.
$13 million in deposits.
Total assets are $108 million.

Current liabilities are $39 million (revolver, AP and accrued liabilities, some notes payable).
$94 million in deferred revenue related to the fractional ownership of the planes.
Total liabilities are $144 million.

I don't need to say much about the equity.

Income Statement:
They've been running at about half of revenues from aircraft sales and half from maintenance and management fees for all three years.

The gross margins on aircraft sales is close to zero if you factor in selling expenses.
The cost of flight operations for 2006 was $32 million vs associated revenue of $23 million.
$13 million G&A.

Given the trouble that Warren Buffett had getting NetJets at a profit, I don't think I'd want to risk betting on this company. And being the exclusive fractional provider for the P-180 might not be all good. I don't get the sense that the airplane is a big success and I wonder how much of the airplane developer's costs are being loaded into Avantair.
A new Avanti II obtained European and US certification in November 2005. Six months later, seventy planes were already ordered (36 by Avantair).
The P.180 makes a distinctive square wave noise when passing overhead, similar to the Beech Starship, due to wing wake and engine exhaust effects on the propeller. It is relatively noisy compared to most turboprop aircraft.
A square wave is pretty close to what the movie Dumb and Dumber claimed was the most annoying sound in the world (ok, maybe not, but it's pretty damned annoying). As an engineer, as a matter of principle, I would want to avoid owning machinery that consistently emitted anything close to a square wave, as this sound contains a large amount of power in the very high frequencies which seems like it would be inherently self-destructive over time. I mean, just look at the waveform.

Mainly, I just think this company is likely to fail.

Not interested

Spent April 20-23 in the hospital. No losses. Finished re-reading Deep Survival and Blink.

Wednesday, April 18, 2007

uranium futures

NYMEX and UxC are going to create uranium futures, also covered in the Wall Street Journal ($$paid subscription required). Here's an introduction to futures from NYMEX.

This UxC article has a lot of info and background.
In June of 2003, we were alarmed (we said “fascinated” at the time) by the fact that uncovered requirements on the part of U.S. utilities were so large in 2006, just three years away at the time. There seemed to be an impasse or perhaps a disinterest in contracting, which translated into this large uncovered position. Because of the large amount of contracting yet to take place in an environment where production was not expanding, it appeared to us that there was no way the market could clear at anywhere near the then spot price of $10.90 when 2006 came around. Because of this, we wondered if the market had failed. (see “A Case of Market Failure?” The Ux Weekly, June 9, 2003, p. 1-2).
UxC then did a survey of market buyers and sellers what they would bid/offer for 250K pounds of U3O8 for July 2006 delivery. The bids were in the $12 range. The asks were a bit higher. But matching up bids and asks showed that a fluid market would have produced higher prices.
In hindsight, a futures market existing in 2003 would have served the market well, as it would have given more advanced notice of the tight future supply situation that existed. Prices would have been bid up sooner, prompting a quicker response in production and exploration. Utilities certainly would not have liked seeing higher prices, but if they had known what the alternative was (which is what actually happened), they would have been more accepting.
Of course, the longer the delay, the better for those producers who saw it early and started acting. Strathmore Minerals clearly saw it; that was their business plan going back before 2003.

And my guess is that a futures market now is going to expose a massive imbalance in the future with even higher prices. But we'll just have to wait for it all to play out.
...some futures trades have already taken place in uranium and Tullett Prebon has set up a nuclear fuel derivatives desk (see the Ux Weekly, April 2, 2007, p. 3).
To many, it may seem like the uranium market has changed more in the past two weeks than it has in the previous 40 years with price soaring to new heights and the introduction of a futures market, while they are still getting used to the presence of hedge and investment funds.
Yeah, things are happening fast.

The futures are both on and off exchange. Cash settled, meaning there's no taking delivery of actual uranium, it's just a bet on future prices. UxC will be determining the actual spot price over time as it's done for more than 20 years. The Financial Times has an article on this thing, too.

NYMEX Chairman Richard Schaeffer said, "We are excited to introduce uranium futures contracts and to provide the industry with a transparent price discovery mechanism. We expect to create a benchmark contract for this important and underserved global market. NYMEX is gratified to launch innovative products, and uranium is uniquely positioned to act as a complement to both our energy and metals product offerings. We are proud to partner with Ux Consulting, the recognized market leader."

UxC President Jeff Combs said "The experience this decade has clearly indicated that the uranium market would benefit from additional price transparency, especially in terms of forward prices, as market participants formulate budget and investment decisions in this critical period of a renaissance in nuclear power. We are pleased to partner with NYMEX, the global leader in commodities–based futures trading, in the introduction of uranium futures products, and applaud NYMEX for investing the time and resources necessary to make uranium futures a reality."

When the market is allowed to create a pricing structure for uranium way out into the future, we'll all get to see what it looks like. Real Wisdom of Crowds stuff.

The Wall Street Journal says
The futures contract would be designed to offer the operators of nuclear-power plants a vehicle to hedge against rising prices. It would also provide a forum to bet directly on gains and falls in the price of uranium, rather than speculating on the fortunes of companies that mine the metal.
I'd rather rely on my investment in Strathmore Minerals as I believe it is significantly undervalued relative to the current and expected future price of uranium. Perhaps I might bet against uranium in the futures market to partially hedge my Strathmore investment. Probably not.

"Anything that will add transparency to the uranium market is a good thing," Jim Malone, vice president of nuclear-fuel management at Exelon Corp., a Chicago-based nuclear operator, said in a statement. Mr. Malone didn't say whether Exelon would be interested in trading the new contract.

"The only people who it is going to get traction with are the investing players," said a uranium broker, adding that power producers are more likely to stick to the long-term contracts they use now.

My guess is that the market sees this as something which will siphon money away from mining companies. This would explain the price drop in uranium mining stocks. I believe that in the long run the market is much more efficient than that. If something is clearly worth more than it's selling for, the price will eventually go up to something close to its value.

Monday, April 16, 2007

Alliance Atlantis Communications (AACB)


Canadian cable TV provider. 13 channels. Includes "CSI". 4 of their digital channels were in the top 10. Showcase Action ranked #1 in digital channels (has been there since 2002).

Controlling interest of 2/3 of the voting shares are owned by Southill which is owned by the Chairman Michael MacMillan and Seaton McLean. The small number of voting shares controlled by two people gives it a bad smell like the New York Times.

The annual report for Dec 31, 2006 is on their website. Revenue has been increasing for the past 2 years.
34% gross margins in 2006. 35% in 2005. 31% in 2004.
4.1% net margin in 2006. 6.8% in 2005. 2.9% in 2004.
Diluted earnings per share: C$1.13 in 2006. C$1.61 in 2005. C$0.78 in 2004.

They list free cash flow as C$103 million in 2006. C$120 million in 2005. (C$23 million) in 2004. [C$100 million seems about right, looking at the cash flow statement]

The fastest growing part of the business, "Entertainment" (up 76% since 2004) has gross margins of 34%.

Broadcasting segment:
Controlling interest in 13 Canadian TV channels and operates them. 50% interest in 2 French Canadian channels. Non-controlling interest in 3 other English niche channels.
Homegrown channels: Life Network, Showcase, Chowcase Action, Showcase Diva, History TV
Partnership channels: HGTV Canada, Food Network Canada, Fine Living Canada, National Geographic Canada, BBC Canada, BBC Kids, Discovery Health Channel.
Working on HDTV: just launched Showcase and National Geographic
Revenue comes from both ads (100% retained, ave 12 minutes per hour) and montly fees (some regulated, some negotiated).
7 of the 8 digital channels have over 1 million subscribers.

Entertainment segment:
CSI distribution outside the US worldwide. AACB owns 50% of the show in all forms in perpetuity. CSI expenses are recorded as investment and amortized according to AICPA SoP 00-2. CSI revenues were C$417 million in 2006 vs C$288 million in 2005, but this was due largely to second window license fees (cablecast/weekday syndication). I don't know much about CSI and the trajectory of the show's popularity.
Also a library of 1,000 titles, 5,500 hours. This is only about 10% of the segment and declining.

Motion Picture Distribution segment:
51% indirect ownership of Distribution LP, Canadian distributor of movies and made-for-TV programs, possible European expansion. Theaters, TV, VOD, DVDs. In 5 years, they've released 84 movies, 196 DVDs in Canada. Canadian rights for Mirimax, New Line Cinema, Focus Features, Weinstein.
They estimate 13% theater market share.
This business was fairly flat in 2006.

I really like the line-item breakdown of changes on the balance sheet on page 28. Operating cycle is up to three years and they don't split out current vs non-current assets/liabilities (non-classified balance sheet).

Bought back 2.9 million shares, partially offset by stock options.

Audited results. Price Waterhouse Coopers
Assets are mostly AR and investments in programs and films with some cash, broadcast licenses and goodwill.
Liabilities are mostly AP and loans.
Balance sheet seems reasonable. Business seems fairly capital intensive.

Operating cash flow is better than earnings minus capex for two years. Lots of cash goes into CSI. Amortization of film and TV shows pulls down earnings.

Two classes of shares: Class A voting. Class B non-voting. Their descripton of the capital structure is [not] surprisingly lacking in detail. The Notes section has more. Both classes are identical except for the voting. At the holder's option, Class A can be converted into Class B... seems unlikely but see below. Class B can convert into Class A under very specific circumstances.

Start of 2005:
2.8 million class A shares
40.4 million class B shares

1.8 million A shares were converted to B.
6K A share options exercised
548K B share options exercised
497K B shares repurchased, cancelled

Then in 2006:
753 B share options exercised
2.9 million B shares repurchased, cancelled

End of 2006:
1 million A shares
40 million B shares
1.8 million B share options outstanding
They grant about half a million per year

Roughly 43 million fully diluted shares.

Up to C$10 million bonuses in the motion picture distribution part of the business.

Up to 600K preferred share stock options with a 1 cent strike price, vesting based on target motion picture distribution goals. Convertible into subordinated LP units. This will need more details.

Need to look into the variable interest entities.


I don't know much about CSI, most importantly how much sticking power it has. In fact I almost never watch TV anymore. Some shows like the Simpsons just keep going and going. Others are amazingly forgettable. Maybe some that seem forgettable will come back again. I have no idea.

I don't have a good sense for how stable the balance sheet is.

A "no assumptions" guess would put the stock being worth around C$35 or US$31. The price is a bit over US$44. It's been going up fairly steadily over the last 4 years.
Definitely worth following

UPDATE minutes later:
It seems that AA Acquisition Corp is trying to buy them out at C$53 per share. May 18th hearing. A fund owns the other 49% of Motion Picture Distribution LP and believes they need to consent to the sale. Since the stock is selling fairly close to the expected acquisition price, this stock isn't worth following. No matter where you start looking (recent news, the annual report, etc.), the thing that rules an investment out is likely to show up somewhere else.

Thursday, April 12, 2007

Eternal Technologies (ETLT) 10-K

For no good reason, I'm going to look through the ETLT 10-K for 2006. (ETLT combined links).

Full year ending Dec 31, 2006.
47 million shares on March 23, 2007.

Jan 1, 2007 purchased 22% interest in Hong Yuan Acquatic [sic] Products ("the turtle farm"). $3.8 million in cash and 2.7 million shares.

The E-Sea equipment is manufactured in Shenzhen. 9K sq ft. $2.6K/month.

Steady 68 full-time employees. 3rd parties for bio research etc.

Feb 7, 2007 ETLT received a comment SEC letter for the prior 10-K and Q3 10-Q. Normally these show up in EDGAR. It's odd that there was no 8-K filed or press release saying they received it.
The ultimate resolution of these comments is currently uncertain and may require the Company to file amendments to both of the aforementioned filings.
Tianjin offices are about 1K sq ft. $964/month.

The 2.8 million acre farm land use rights were purchased from the Chinese government in 2000. $6 million. Expires 2026. They're leasing it out for 20 years for $579K per year.

The re-filed Tedrow lawsuit is still there. Nothing new.

China relaxed the restrictions on cash somewhat, but it's difficult for ETLT to pay more than $50K in dividends per year.

Category                        2006            2005            Difference
--------- ------ ------ -------------
Lamb meat $3,641,995 $3,775,924 $(133,929)
Cattle embryo transfers 5,261,912 9,348,688 (4,086,776)
Sheep embryo transfers 0 1,872,419 (1,872,419)
Sheep 0 234,155 (234,155)
Embryo transfer services 1,353,063 438,848 914,215
Roll mutton 9,433,229 6,169,256 3,263,973
Land lease 289,405 0 289,405
E-Sea 8,738,499 1,193,674 7,544,825
------------- ------------- -------------
Totals $28,718,103 $23,032,964 $5,685,139
============= ============= =============

Category                     2006                       2005
--------- ------ ------
Lamb meat 29.8% 29.4%
Cattle embryo transfers 27.2% 30.9%
Embryo transfer service 8.3% 16.7%
Roll mutton 18.6% 24.7%
E-Sea 64.7% 59.9%

SG&A is up 73%. $1.2 million increase in G&A. About 1/3 of the increase is due to salaries. Also E-Sea marketing fees.

Earnings are up 20%, but share count is also up.

The short term investments are with investment companies rather than banks, although they're essentially like CDs.

$537K purchase of patents.

$512K investment use of cash was "advances", which seems odd.

The focus going forward is:
1) the turtle farm
2) acquisition to add to E-Sea
3) get US FDA approval for E-Sea

Ham Langston Brezina still the auditors.

Balance Sheet:
Cash and short term investments are down to $31.4 from $40.2 million in Q3.
AR and inventories are up by about the same amount from Q3.
AP and accrued liabilities are up by over a million. [UPDATE: down by over a million]
Equity is up by around three million. [UPDATE: vs Q4]

Income Statement (looking at Q4):
Revenues for Q4 were around $7 million vs $5.7 million in the prior year.
Gross profit was around $2.7 million, about the same which means gross margins dropped.
SG&A was around $1.8 million, about twice as high as it's been running during the year, but the prior year's Q4 SG&A was $1.15 million.
Operating profit was down to $660K from $1.28 million in the prior year's Q4.

Earnings per share was 11 cents diluted.

3 million shares were issued for cash (40 cents each).
713K shares converted
Balance is around 44 million shares.

Cash Flow:
Operating cash flow is way down due to inventory increase (embryos).
No capex.
Patent purchase of half a million.
Advances to distributors (that's an investment?) of half a million.
$1.2 million raised in selling 3 million shares.

NOTES (I'm just scanning these):
Hehe, cows are depreciated over 5 years.

Inventory is nearly all sheep and cow embryos ($5 million) and this has jumped from around zero in the prior year.

Zero stock options outstanding.

E-Sea is taxed at 15% (the agriculture is zero due to dropping the two thousand year old tax).

42% supplier concentration in one supplier.
23% supplier concentration in another supplier.
10% in a third.

15%, 18%, and 23% customer concentration.

Executives and directors (Chairman as well as the CEO) own 6.54% of the company.

Audit fees $173K, about the same as last year.


The only thing "fishy" I see is the SEC communication, which could be anywhere from no big deal to very serious [UPDATE: regardless of what the company might claim]. I'm not buying the stock. I sold it a while back. However, I do have a related party that still owns the stock ("I like my sheep embryos"). Other than the SEC communication, anyone who does own the stock would probably take these results as being fairly positive [given the stock price].

My favorite ETLT quote (from the FAQ no less):
We will produce high-tech electronic product. We will hold the exhibition to show the samples in US in 3rd quarter this year. I think the shareholders will not say we are crazy any more at that time.
Emphasis added. Whatever else I might think, this is definitely a company worth following.

UPDATE same day:
I'd guess that the market's concerns (beyond the problems I talked about here and here), are that this is an odd business that won't scale in the manner of CXTI. They don't seem very professional at all. Two examples of businesses that didn't seem professional at all are QBID and Wal*Mart in the very early days. When you looked under the hood of the first one, it was ridiculous. The other went on to unprecedented greatness.

If there's nothing terrible under the surface, then ETLT will be cheap in hindsight. Otherwise, it will look way overpriced.

Tuesday, April 10, 2007

China Education Alliance (CEDA) 10-K... with huge expenses

CEDA (combined links) issued their 10-K. Q4 SG&A went up by a factor of 10 or so!

First 9 months SG&A: $738K
Q4 SG&A: $2.9 million!

The management's discussion offers essentially no good explanation:
Selling expenses increased by $1,234,518 or 727% to $1,404,319 from $169,801 in 2005 due to the increase in agency fees associated with increased sales and advertising.

Administrative expenses increased by $1,403,916 or 1,243% to $1,516,865 in 2006 as compared to $112,949 in 2005. The increase is due primarily to an increase in salaries due to bonuses paid at year end and the overall growth of the business of the Company.
Bonuses paid at year end? The compensation summary on page 24 shows no bonuses. So any bonuses went to people other than the top executives. If the bonuses were paid to the top officers during 2006, they'd show up here. If they were paid in 2007, they'd be a subsequent event and wouldn't show up in these financial numbers.

Let's break out the Q4 numbers by subtracting the year's numbers from 9 months in the Q3 10-Q. ["Pappy" has an interesting view: that the full year results don't rely on the quarterly results, which are not audited. In other words, arguing that the full year's expenses included larger amounts in Q1-Q3 that have not been restated. Normally a company will go back and restate quarterly results based on things that get fixed in the audit. And before they, I imagine they would issue a statement saying not to rely on previous interim reports as they will be restated.]

This is all for Q4:
Revenue: $2.52 million (up somewhat from $2.3 million in Q3)
Cost of Goods Sold: $670K (down from $734K in Q3)
SG&A: $2.3 million (up from $359K in Q3)
Interest expense: $142K (up from $5K in Q3)
No taxes
Minority interest in loss of subsidiary: $44K (this is added)
Net loss: ($55K)

Now let's look at cash flows for the year. They had a net income of $2.62 million for the year. They pre-paid $1.25 million for mostly advances to teachers and prepaid advertising and operations ended up generating $1.86 million.

They purchased $1.74 million in fixed assets and $690K of franchise rights (that was in the press release not long ago). $2.43 million invested. Franchise rights are amortized over 5 years.

They borrowed $1.53 million in notes payable (the Sept 29, 2006 bridge loan) and $18K from a shareholder. CEDA issued warrants for 3 million shares, stike of 50 cents. The loan matured in March of this year.

They show a supplemental disclosure of $25K interest paid when there's an interest expense of $147K on the income statement.

$1.25 million prepaid.
At December 31, 2006, prepayments to teachers to provide online materials totaled $872,941, prepayment of rent expense totaled $299,057, and prepaid advertising totaled $149,450.
Presumably this stuff is run through the income statement when the associated revenues occur (or if/when the assets are impaired).

$469K of advertising expenses for 2006. Less than $2,000 were expensed in Q3. $25K in Q2. None in Q1.

The tax holiday ended on April 8, 2007. The next 3 years runs at a half tax rate.

$88K additional investment in buildings in Q4.
$3.8K additional investment in vehicles in Q4. Odd.
Some of the other categories changed.
Total of $1.54 additional investment in PP&E in Q4.

$174K of the G&A expenses were attributed solely to the parent company.


I might be acting stupid here, but I only sold one-fourth of my stock after that bizarre 10-K. I'm relying somewhat on gut instinct and somewhat on the fact that, after dumping a quarter of my stock and after the price drop, I'm reasonably comfortable owning this much stock at this particular price point. We'll see what management says next.

Saturday, April 07, 2007

Stop and Think

For anyone wondering about CEDA, I've gone through the 10-K already. I sold one fourth of my holdings just to reduce my exposure. I hope to post the notes soon. I'm not happy with the increased expenses in the full year results and especially the company's explanation of them. This may turn out to be a "hot stove moment". You might intellectually know about hot stoves, but until you put your hand on one, you don't know it at a gut level*.

The whole uranium thing I've been covering is big. I've never seen a supply/demand situation this perfect before. In fact, it's hard to imagine it being better while still being realistic. For Strathmore Minerals, the only thing better would be for the spot price to have remained low instead of going up so insanely high so soon. Right now, there's a lot of money and effort being thrown at uranium. Australia is likely to allow a 4th and 5th and 6th uranium mine to open. But there's a lack of mining engineers, mining equipment, not to mention the extremely long pipeline of getting to production. The stock prices of the various uranium stocks have been muted I think because no one wants to be the chump who buys at a high point only to see the stock drop back down as the hype subsides. It all has to play out in that strange and unpredictable way of the market.

I knew I was on the wrong side of the trade when I sold my last CXTI and the market has proved me right. But I needed the money for a private investment. I just wish I'd sold CEDA instead, but there was no way of seeing that beforehand, so I don't count it as an error. It doesn't matter: CXTI was glorious.

I had planned to go through a portion of the Pink Sheets stocks again, but that effort has been slow. I finished the letter W and most of the letter C. The child laborers have [NOT] gotten lazy and so have I, unfortunately. [UPDATE April 28: The sole remaining child laborer is most definitely not lazy, but rather busy with other work. In fact, he has been sending me results that I haven't yet gone through. I stand corrected.]

Definitely looking forward to the CFRI conference call. CFRI received my questions and I hope they cover at least some of them during the call.

Jones Soda (JSDA) just keeps going up. Not buying it wasn't a mistake in my book. How should I know whether the stuff will continue selling or not. I had looked at it as far back as when it was $5.32. D'oh!

* it's in the reading list.

Uranium jumps to $113 a pound

StockInterview has the details.
A modest lot of 100 thousand pounds U3O8, offered by tiny privately owned Texas-based Mestena Uranium LLC, drove bidders to establish a new record spot uranium price. “The spot uranium price rose dramatically this week, jumping $18 to $113/pound U3O8, following the results of the sealed-bid auction,” according to Nuclear Market Review (NMR) editor Treva Klingbiel.
The price is up 57% just this year.
Klingbiel gave three reasons for the aggressive bidding: ERA’s recent mine flooding, continued interest from speculators and utilities seeking significant quantities for near-term delivery. New demand from a U.S. utility also emerged in the long-term uranium market this week. The long-term uranium price remains unchanged at US$85/pound.
But the real story behind the long-term price is that contracts written nowadays have clauses for adjusting the price updwards to follow the spot price, pricing floors, and other stuff that's good for sellers and bad for buyers. For contracts, you need to look at more than just the price to get a sense of changing dynamics.

UPDATE April 8, 2007:
Another source for the $113 number.

UPDATE April 10, 2007:
"...there is more of this to come."

Sunday, April 01, 2007

uranium observation

StockInterview.com just keeps coming out with new articles. This time it seems like they don't have much news.

There are two interesting things here. The first is that buyers are avoiding paying high prices for uranium by borrowing the supplies that investors have purchased. The second is about mining companies purchasing uranium to fulfill contracts when they aren't able to mine enough uranium (Cigar Lake, Ranger Mine).
How much strength remains in the uranium price momentum? In a not-yet published interview with Dr. Robert Rich, he told StockInterview that this depends upon whether major mining companies will continue buying, among other factors. During our interview, Dr. Rich discussed his recent role in obtaining material on behalf of an unnamed major mining company to honor clauses in its uranium sales contracts with utilities.
Over time, none of these things will make the slightest difference. What does it matter whether the mining company goes out to buy uranium to fill the shortfall or whether the end buyer does it? And in the end, it doesn't matter whether investors loan out their uranium now and allow the end buyers buy it back later or the end buyers buy it now. On a large scale and over a reasonable time frame, the only difference is who pays and when. The same uranium ends up in the same places.

That wouldn't be true if there was no uranium shortage. When the investors who snapped up all that uranium (which supposedly was responsible for driving prices up) loan out the uranium to the end buyers, that would relieve the buying pressure and uranium prices would go back down again because the supply is now being dumped back into the market. When mining companies buy up uranium now to honor their contracts, they're the ones paying the high prices now, but the prices would go back down again when the dust settles.

We've been told that this is what the buyers believe, and with the loaning out of investors' uranium inventory, this adds a lot of evidence. If buyers believed the price was going higher and higher only to stay there for perhaps 20 years, they'd be buying uranium, not borrowing it. The lack of buying on the spot market also supports this notion of buyers not believing the prices are "real". (It's also a good reason to sell the stuff at auction.)

This reminds me of the endless message board discussions for stocks whose prices have been in a long term decline. People always, and I mean always, believe that the price is being manipulated by powerful people bent on causing them grief. And it's amazing how twisted the logic can be to support the argument. On the ETLT message board, there was at least one person arguing repeatedly that someone was selling lots of shares over a long time period to push the price down so they could buy up even more shares at a lower price. I don't think any of those people have ever tried to manipulate the markets because it's extremely difficult to do and extremely dangerous. Even the oil cartel is only able to keep oil prices high about once every two decades, which is probably when supply and demand would have pushed up prices anyway.

The buyers probably see this huge influx of people more interested in money than in the uranium industry. They see these new people buying uranium and they see the prices go up to levels not seen since the Disco Epoch. They assume the new people caused the big imbalance and not vice versa. After all, consumption has exceeded production since the 1980s, and prices stayed ridiculously low all that time.

The answer is simple calculus. Looking at this chart, imagine taking the integral of the blue curve minus the yellow curve from 1945 until time "t". The red curve represents uranium that is essentially stockpiled as HEU within nuclear weapons. Some of that will always remain within a certain minimum number of weapons. We'll call that amount "M" for permanent military stockpile. So if at any time "t" the (integral of (blue minus red )) minus M ever equals zero, then the world has run out of uranium. If that calculation even gets close to zero, you're going to have some serious increases in prices, especially with aggressive new buyers like China, Russia, and India which, combined, account for about a third of the people on earth; people who want to join the middle class with its refrigerators, televisions, air conditioning, and other energy eating things (and who quickly get tired of the pollution from coal). The new buyers are not going to be part of the chummy club that's been static for the last 25 years.

There's simply no way that investors buying a small percentage of uranium would cause a 10x jump in price. Buyers being in denial of that has no impact on how this all plays out.

UPDATE early next day:
Energy Resources is now reporting that because of the Ranger mine flood, total 2007 production for the company will be at 2006 levels and 2008 production will be 25% to 35% lower. Ranger mine production in 2006 was down 19.7% due to flooding as well.

UPDATE April 3, 2007:
senor_blanco left a comment in this post about Sprott Securities being totally different from Sprott Asset Management (which owns a big chunk of Strathmore).

UPDATE April 6, 2007:
Supreme Court Goes Nuclear
The irony is that the beneficiary of Monday's ruling won't be wind power, solar power, or any of the other renewable technologies favored by the Green establishment. Their economic and technological limitations are too severe for them ever to occupy more than a small niche in the American energy economy. Instead, one of the winners from Massachusetts v. EPA just may be something that many of the environmentalists who brought the suit have long abhorred: nuclear power.
Nuclear power is on the verge of making a comeback in the United States. Thanks to several favorable provisions in the 2005 Energy Policy Act, as well as a streamlined licensing process, it is possible we could see the construction of new plants start within several years. The economics for new plant construction are still being worked out, particularly with regard to financing and federal loan guarantees. But there can be no doubt that federal efforts to hamstring coal can only help nuclear.
If you think the nuclear industry is happy with the ruling, think again. That's because the nuclear "industry," such as it is, consists of investor-owned utilities that own coal-fired power plants in addition to nuclear plants.

But it is good for the uranium industry. It's like the perfect storm tipping point paradigm shift....

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