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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.

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