Saturday, May 19, 2007
China Education Alliance (CEDA) Q1 Results
CEDA (combined links) Q1 10-Q I'll be comparing these results to the Q4 results in the 10-K I looked at here.
Period ending March 31, 2007.
58 million shares on May 11, 2007.
Balance Sheet
Cash increased to $3.6 million from $1.8 million.
Prepaid expenses dropped 32% to $892K.
PP&E net dropped by $300K to $5 million (but depreciation was only $153K).
Franchise rights increased to $877K from $690K (depreciated over 5 years)
AP is up slightly.
Deferred revenues is down by a third to $205K.
Slight increase in notes payable to $1.53 million
Equity increased by $1.12 million to $8.3 million.
Total assets are $10.4 million.
Income Statement
Total revenue is up 23% from Q4 and more than double the prior year (a lot of that is acquisition).
74% gross margins (up from 63% in the prior year and 73% in Q4).
SG&A is the most important part of the this entire statement. In the 10-K, they showed a huge jump in SG&A while Q1 through Q3 showed much lower SG&A. Since they didn't break out Q4's results, the question was whether that was a single charge in Q4 or whether it was somthing which showed up in the audit and required them to restate the prior quarters. However, they never issued amended 10-Q statements... but this is a Chinese reverse merger, and we've seen that it takes time for them to get their accounting act together. Didn't Buffett say something similar about Korean companies?
So anyway, if the SG&A in Q1 is high, then we [might] assume that the 10-K increase was for the whole year and not just Q4. It also would make it much less likely to be shady, in my opinionated judgement.
SG&A is $1.0 million. The 10-K number was $2.3 million while the Q3 number was only $359K. Last year's Q1 number was $175K. A $1 million SG&A number for this year's Q1 is consistent with an overall elevated expense rate explanation for the 10-K result. This is probably why the CEDA stock went up considerably after this report came out.
Breaking down the SG&A:
Selling: $750K vs $89K ($1.4 million in the 10-K)
Admin: $158K vs $30K ($1.5 million in the 10-K)
Deprec: $106K vs $56K ($124K in the 10-K) (Q4's capex + franchise rights was $2.2 million, so this jump vs the 10-K makes sense)
$100K net interest expense. Q1-Q3 last year had almost no expense, but Q4 had $135K net expense. The bridge loan showed up during Q3.
Very low tax provision.
Net income is $1.0 million vs $680K in prior year, a net loss in Q4, and $1.2 million in Q3.
$259K foreign currency translation adjustment... sweeeeet.
Cash Flow Statement
Depreciation was $153K while capex was $26K.
Prepaid expenses and other (teacher advances, advertising prepayments) added $429K to cash from operations vs income.
No other significant flows of cash.
I'd guess free cash flow for the quarter to be around $1.3 million.
Notes
Depreciation schedule:
Buildings: 20 years
Vehicles: 5 years
Furniture, fixtures, equipment: 5 years
Franchise rights: 5 years
No impairments. This means $100K of PP&E disappeared? This might be pre-paid service contracts which are amortized (straight line) and involve unlimited access to study materials for a fixed time.
Advertising cost: $146K for the quarter
No customer concentration.
PP&E breakitdown
Buildings: $2.9 million
Vehicles: $133K
Communications equip and software: $1.8 million
Furniture/fixtures: $972K
Total: $5.76 million
Accumulated deprec: $746K
Sept 29, 2006 bridge loan. 6% interest, 1.53 million warrants at 50 cents. Matured March 29, 2007. Paid in full. It seems like the warrants have expired based on the amortization schedule, but I'm not sure.
30K shares issued for services on March 7, 2007.
50K shares issued to an IR agency.
Based on this previous financing agreement, there are now an additional:
6.5 million shares
6 million warrants at 69 cents
3 million warrants at 80 cents
3 million warranats at $1
I'm going to discount the dilution due to the shares somewhat due to the high strike prices of 80 cents and especially $1. So I'm viewing this as an equivalent of 17 million shares of dilution.
I don't see any other dilution, so I'm assuming about 75 million totally diluted shares. This would result in about 1.73 cents of estimated free cash flow per totally diluted share. The business is seasonal with more revenue (but also inventory purchases) in Q3-Q4.
I'd say the business is worth at least a dollar per share, probably a lot more as they continue to grow. I continue to own the shares.
This is what I said about it after the 10-K came out:
Period ending March 31, 2007.
58 million shares on May 11, 2007.
Balance Sheet
Cash increased to $3.6 million from $1.8 million.
Prepaid expenses dropped 32% to $892K.
PP&E net dropped by $300K to $5 million (but depreciation was only $153K).
Franchise rights increased to $877K from $690K (depreciated over 5 years)
AP is up slightly.
Deferred revenues is down by a third to $205K.
Slight increase in notes payable to $1.53 million
Equity increased by $1.12 million to $8.3 million.
Total assets are $10.4 million.
Income Statement
Total revenue is up 23% from Q4 and more than double the prior year (a lot of that is acquisition).
74% gross margins (up from 63% in the prior year and 73% in Q4).
SG&A is the most important part of the this entire statement. In the 10-K, they showed a huge jump in SG&A while Q1 through Q3 showed much lower SG&A. Since they didn't break out Q4's results, the question was whether that was a single charge in Q4 or whether it was somthing which showed up in the audit and required them to restate the prior quarters. However, they never issued amended 10-Q statements... but this is a Chinese reverse merger, and we've seen that it takes time for them to get their accounting act together. Didn't Buffett say something similar about Korean companies?
So anyway, if the SG&A in Q1 is high, then we [might] assume that the 10-K increase was for the whole year and not just Q4. It also would make it much less likely to be shady, in my opinionated judgement.
SG&A is $1.0 million. The 10-K number was $2.3 million while the Q3 number was only $359K. Last year's Q1 number was $175K. A $1 million SG&A number for this year's Q1 is consistent with an overall elevated expense rate explanation for the 10-K result. This is probably why the CEDA stock went up considerably after this report came out.
Breaking down the SG&A:
Selling: $750K vs $89K ($1.4 million in the 10-K)
Admin: $158K vs $30K ($1.5 million in the 10-K)
Deprec: $106K vs $56K ($124K in the 10-K) (Q4's capex + franchise rights was $2.2 million, so this jump vs the 10-K makes sense)
$100K net interest expense. Q1-Q3 last year had almost no expense, but Q4 had $135K net expense. The bridge loan showed up during Q3.
Very low tax provision.
Net income is $1.0 million vs $680K in prior year, a net loss in Q4, and $1.2 million in Q3.
$259K foreign currency translation adjustment... sweeeeet.
Cash Flow Statement
Depreciation was $153K while capex was $26K.
Prepaid expenses and other (teacher advances, advertising prepayments) added $429K to cash from operations vs income.
No other significant flows of cash.
I'd guess free cash flow for the quarter to be around $1.3 million.
Notes
Depreciation schedule:
Buildings: 20 years
Vehicles: 5 years
Furniture, fixtures, equipment: 5 years
Franchise rights: 5 years
No impairments. This means $100K of PP&E disappeared? This might be pre-paid service contracts which are amortized (straight line) and involve unlimited access to study materials for a fixed time.
Advertising cost: $146K for the quarter
No customer concentration.
PP&E breakitdown
Buildings: $2.9 million
Vehicles: $133K
Communications equip and software: $1.8 million
Furniture/fixtures: $972K
Total: $5.76 million
Accumulated deprec: $746K
Sept 29, 2006 bridge loan. 6% interest, 1.53 million warrants at 50 cents. Matured March 29, 2007. Paid in full. It seems like the warrants have expired based on the amortization schedule, but I'm not sure.
30K shares issued for services on March 7, 2007.
Selling expenses increased by $661,415 or 743% to $750,438 from $89,023 in 2006 due to the increase in agency fees associated with increased sales and advertising.Did it jump suddenly in Q4 of last year?
Administrative expenses increased by $128,068 or 433% to $157,663 in 2007 as compared to $29,595 in 2006. The increase is due primarily to an increase in salaries due to the overall growth of the business of the Company.
50K shares issued to an IR agency.
Based on this previous financing agreement, there are now an additional:
6.5 million shares
6 million warrants at 69 cents
3 million warrants at 80 cents
3 million warranats at $1
I'm going to discount the dilution due to the shares somewhat due to the high strike prices of 80 cents and especially $1. So I'm viewing this as an equivalent of 17 million shares of dilution.
I don't see any other dilution, so I'm assuming about 75 million totally diluted shares. This would result in about 1.73 cents of estimated free cash flow per totally diluted share. The business is seasonal with more revenue (but also inventory purchases) in Q3-Q4.
CONCLUSION
I'd say the business is worth at least a dollar per share, probably a lot more as they continue to grow. I continue to own the shares.
This is what I said about it after the 10-K came out:
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.So far, I believe I made the exact right decision. Selling some of the shares made sense considering the added uncertainty. Will I buy them back? Probably not.
// posted by Bruce @ 9:52 AM 
