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Sunday, August 26, 2007

Nicholas Financial (NICK) closer look

NICK (sec) is still looking good. Quick check of latest financials:

10-Q for the period ending June 30, 2007. Balance sheet looks about the same as it always does. $73 million in equity against $105 million in total liabilities.

Revenues up a bit. Operating income is down somewhat from 2006, mostly due to increased interest expense, increased provision for losses (a good thing), and salaries. Net income per diluted share is 27 cents vs 29 cents for 2006.

Cash flow from operations is way higher than net income due to provision and taxes to be paid. This is actually similar to 2006. They invested a net $4 million in finance contracts vs around $5 million last year. Not much happened in financing. Last year they borrowed $1.6 million.

Assume about a million future stock options in addition to the 10 million shares outstanding on July 31. So 11 million totally diluted shares. Net income is about 25 cents if you assume 11 million shares.

But the real question is in the ratios. For years I've believed that NICK was very well run and would weather a credit meltdown very well.

Finance receivables increased by around 13%.
About 20% finance revenue to receivables ratio (down from 22%)
Provision for losses as a percentage of finance receivables: 2.57% (vs 1.96%)
About 50% debt to receivables ratio (unchanged)
Average interest rate charged: 24.17% (up slightly)
Average cost of borrowed funds: 6.76%
Operating expenses as a percentage of finance receivables: 10.4% (down slightly)
Write-offs as a percentage of liquidation: 7.2% (up from 5.04%)
Net charge-offs: 6.6% (up from 4.7%)

Recoveries are down to 14% from 19%. This is probably part of a longer trend as NICK expands into areas farther away, making recovery more difficult. They expect this number to continue to decline.

I don't see any significant changes in the loan contracts purchased or the contracts originated.
The provision for credit losses increased from approximately $810,000 for the three-month period ended June 30, 2006, to $1,197,000 for the three-month period ended June 30, 2007. The Company’s losses as a percentage of liquidation increased from 5.04% for the three months ended June 30, 2006, to 7.20% for the three months ended June 30, 2007. The Company anticipates losses as a percentage of liquidation will be in the 6-10% range during the remainder of the current fiscal year.
Here's what they say about the economic conditions that everyone is worried about:
The Company believes there is a correlation between the unemployment rate and future portfolio performance. The Company believes the down turn in the housing sector is affecting its customer’s employment status and does not foresee any recovery during the current fiscal year. The number of bankruptcy filings by customers during the three months ended June 30, 2007 was consistent with the three months ended June 30, 2006.
I have to think that the really bad mortgage financing tricks have a lot to do with it. People's mortgages are ratcheting up and housing prices have dropped.

Delinquencies as a percentage of contracts outstanding:
Purchased contracts:
30-59 days: 2.00% (up from 1.51%)
60-89 days: 0.74% (up from 0.55%)
90+ days: 0.25% (up from 0.16%)
Direct loans:
30-59 days: 0.96% (up from 0.80%)
60-89 days: 0.64% (up from 0.35%)
90+ days: 0.40% (up from 0.11%)

43% of NICK's borrowings are subject to interest rate swaps to match floating vs fixed rate assets.

There are now 47 branch locations, with 19 in Florida (land of scary housing). Each office can handle up to 1,000 loans, $7.5 million in receivables. Only 6 branches have reached capacity.

NICK plans to continue expansion.

I think NICK is currently selling at perhaps a 50% discount. The current stock price is $8.56. Like I said in prior posts, I believed NICK would probably not reach full value until after a credit market disaster proves that they're not doing anything stupid.

I'm thinking of buying NICK at this point.

Thursday, August 16, 2007

more thoughts

I've been waiting for the current sub-prime meltdown for years. So have a lot of other people. There are various flavors of what people have been expecting, but it's essentially all about too much liquidity, too much credit, risk and reward failing to fall in the same place. We've heard the stories about horrible lending practices. At one point I bought some put options on Fannie Mae. They expired worthless.

If I had "stayed out of the pool" until this all unfolded, I'd have a lot less money today.

I had owned Nicholas Financial (NICK) years ago and made very good money on it. In this post in March of this year, I noted that...
And NICK (sec) is doing fine: after the subprime panic clears up, they'll look very good, in my opinion.
NICK is down right now because of sub-prime issues (it is, after all, a sub-prime lender). I suspect that it's probably a very good investment right now. If I had to pick another investment, that's the first place I'd look.

Back in April 2006, I noted here that...
Fears of NICK as a sub-prime lender will continue until there's a major downturn in sub-prime lenders and that will hold the price down, no doubt.
I was explaining to someone my casual theory that during bull markets, stock prices drop fast and go up slowly. In bear markets the prices rise fast and drop slowly. This is just based on casual observation; it's probably wrong. I think it's somehow connected to the saying that the bull market ends when the last bear is gored while a bear market ends when the last bull is mauled. Or the more common saying that in a bull market, stock prices climb a wall of worry.

In a bull market, the money is not yet fully invested. In a bear market the money is not yet fully on the sidelines.

In a big long secular bull market, the money hasn't yet all been created. And I believe that's the case today.

Getting back to the whole sub-prime meltdown thing, a lot of people have been expecting this. And I wonder if a lot of money has been parked outside the markets waiting for it to happen. Jim Cramer, my favorite contra-indicator on macro stuff, claimed in no uncertain terms that it's armageddon. I don't automatically assume that Cramer is wrong, but I think in this case he is. It may look like armageddon from inside Wall Street, but I don't see this causing Great Depression II. From what I understand about Great Depression I, it was caused by what today would be considered monumental stupidity: of course that's going to be the result. The causes of the sub-prime mess today will seem like monumental stupidity to the general financial community decades from now (today is just looks like garden variety stupidity).

So I'm wondering if the impact of the sub-prime mess happening is that it finally resolves the issue and stocks like NICK will get recognized for the cash they generate instead of the fear that was overhanging them. And I'm wondering if this will prove true for a lot of other stocks as well. Will this clear the air finally?

If we don't get armageddon and this turns out to be just another ordinary crisis, then perhaps a lot of bears are going to be gored.

UPDATE next day:
CXTI found a new CFO. That was fast, it was an internal promotion. That explains the 15% gain in the stock, I suppose.
Qiyou Li (Jeff) was appointed as CFO of the Registrant on August 15, 2007. From September 2005, to the present, Mr.Li has been the financial controller of Expert Network (Shenzhen) Co. Ltd., the Registrant’s wholly owned subsidiary, and was responsible for all financial, accounting and internal auditing. From October 1999 through September 2005, Mr. Li was the financial manager of ZhongQi Power Technology Company, where he was responsible for the establishing and maintaining the budget for the headquarters and for seven subsidiaries. Mr. Li holds a Bachelor degree from University of Jiangxi Finance and Economics.

Hopefully by now Jeff is aware of his new position in the company. Seems like it might have been a bit rushed in order to avoid a continued stock meltdown.

Fission Energy (FSSIF) bought some

I bought some shares of Fission Energy (FIS.V, FSSIF) in the range of 47 cents to 56 cents. At 47 cents, the market cap is around $12 million (one third of at most 77 million shares times .47) which is what the market is valuing all of the Canadian and Peruvian properties at. I'm thinking that's more than a bit low. I already own shares of Fission Energy from the spinoff from Strathmore Minerals.

Details later.

Tuesday, August 14, 2007

China Education Alliance (CEDA) Q2 results

China Education Alliance (combined links) filed their 10-Q today.

10-Q (comparing against Q1's results)
Period ending June 30, 2007
58 million shares on Aug 10, 2007


Cash is way, way up. $8.3 million up from $3.6 million.
PP&E, net is up by $1 million to $5.5 million.

Deferred revenue liability (debit cards issued for downloading materials) is way up to $1.2 million from $205K
Notes payable increased by nearly $2 million to $3.4 million (that's probably where a lot of that cash came from)

Current ratio is around 3.

Paid-in capital increased by $343K for some reason.
Retained earnings increased by $1.38 million.

differences are from Q1

Online revenues increased by $1 million or 42%!! This is quarter over quarter!
Training center revenues increased by $172K or 37%!
Total revenue is now $4.35 million.

Online COGS actually decreased!
Training center COGS increased only 4%!

Overall gross margin was 80%, up from 71% in Q1.

Selling costs increased by 45%.
Admin costs increased to $438K from $158K.

Interest expense is up to $389K from $104K

$153K provision for tax, up from $84K (I consider that good)

Net income was $1.4 million, up from $1.0 million
Net margin was 32%, about the same. I can definitely handle that.

Return on total assets was 9.1%. Fair. UPDATE 10/1/07: This is waaaay wrong! The actual return on non-cash assets is more like in the high double digits! And return on equity is running at around mid double digits. I was looking at quarterly income.
Return on equity was 14%. [see above]

I had assumed 75 million totally diluted shares when I looked at Q1.
The GAAP weighted average is 62 million.

Six Months

Operations generated $4.86 million in cash on $2.40 million net income (most of that was this quarter)
Customer advances, drop in pre-paid expenses, amortization of a loan discount, depreciation, etc. Every single adjustment was an increase in cash.

Capex was $501K vs $384 depreciation.
No other investment.

$1.33 million in loans were paid off
$3.4 million in additional loans were taken out
$2.6K loan from a shareholder
Financing overall generated $2.07 million

The net increase in cash for 6 months was $6.48 million


$390K pre-paid advertising
$264K pre-paid to teachers
$127K pre-paid rent

No customer concentration (obviously).

PP&E is mostly buildings and communication equipment/software, plus furniture/fixtures. About 14% depreciated.

The $3.4 million was convertible debt used to repay the bridge loan. They created a preferred stock, series A convertible preferred.

Convertible Debt
I covered this in the Q1 analysis and ended up with 75 million totall diluted shares. I had started picking this apart again with the nagging feeling that I had done it before. D'oh!

Q2 Results
The vocational studies programs were added [as expected].
The online revenue includes some advertising revenue (not expense!).
Online gross margins are better because costs are fairly fixed.
Training center margins increased due to less amortization of of intangibles and decreased payments to lecturers (hmm).

Selling expenses increased enormously because they really didn't have a selling effort in the prior year. These include agency fees associated with increased sales of debit cards.

Admin also greatly increased due to the growth of the business.

50% tax holiday for 2007, 2008, and 2009. Taxes will double in 2010.

I've noticed in going back over previous quarters that the business is not very seasonal.


This is great. I'd put the value of the company at $1.20 or more. The stock closed today at 60 cents. If they keep expanding like this, then it would be worth a lot more. I continue to hold the stock.

Monday, August 13, 2007

thoughts for today

If you look at stock message boards, whenever a stock is going up, no one ever blames it on manipulation or senseless panic buying or conspiracy theories. It's always for good solid reasons. When a stock drops a great deal, that's when you start hearing the most bizarre explanations for things. Easy phony answers.

Is it bad to buy a stock for a good price only to be offered a better price later on? If the stock is worth a lot and it will eventually reach that price, why does it matter what happens in the meantime? with the exception that your choices are more limited while the stock is down (ironically because it becomes an even better investment going forward and would require an even better choice to replace it). I've been lazy lately with investment work and the falling prices of a number of stocks just makes it easier to be lazy. I'm very unlikely to find something better than CXTI at $2.66 or Strathmore at $2.17. It would be nice if CVU went to full value after reporting fairly good results. But that doesn't seem to be happening.

People say they can predict short term price changes, but I see a lot of them ending up wrong. Maybe some people are successful, I don't know.

I hear that there's a lot of disruptions going on in the hedge fund world right now. Managers are shedding risk, unwinding positions. Things that were never supposed to happen actually did happen (like they do every 10 years or so).

But I believe that's all noise.

UPDATE next day:
What an odd day for CXTI. They announce they'll file late and the stock price stops dropping and climbs 25%. I bought more shares in the morning just after the open, around $2.55.

Tuesday, August 07, 2007

Strathmore Minerals (STM.V, STHJF) reality check

First of all, it appears that Fission Energy, the Strathmore spinoff company containinng all the Canadian and Peruvian properties, is now on the Pink Sheets with the symbol FSSIF. It last traded at 66 US cents. Unlike the Canadian Fission Energy stock, FIS.V, this one is in US dollars, like STHJF for Strathmore itself. Strathmore last traded at $2.371. Strathmore+Fission traded for almost the same price back in Feb/Mar of 2005 when the spot price was $29 and there was no progress on permitting, joint ventures, or anything.

Strathmore has 77 million shares fully diluted. Fission Energy would have 1/3 of that, or 25.7 million shares. Strathmore now has a market cap of around $183 million.

Looking at their latest investor relations presentation from May 2007.

Strathmore is currently permitting the following properties:
Sky, Wyoming: estimated production 2010
Church Rock, NM: estimated production 2012
Roca Honda, NM: estimated production 2012

Roca Honda resource (500-600 meter depth, est. 94% to 97% recovery, operating cost estimate $17 to $20 per pound):
measured and indicated: 17.5 million pounds at 4.63 pound per ton (0.23%)
inferred resource: 15.8 million pounds at 3.48 pounds per ton (0.17%)

Roca Honda has a paved road and power within 2 miles and a good climate for conventional mining. "Not located in 'Indian Country'"

Remember that Strathmore ends up with only perhaps 40% of the profits in the joint venture with Sumitomo.

Ok, so let's say they recover 90% of the uranium at Roca Honda. That would be 30 million pounds. Note that this is a conventional mine, so there are going to be milling costs, but Strathmore is working to open a mill nearby. Will they be able to open it? They're going to need that mill, but even if they get it, it will take a long time before it's in production.

Definitely read this article on milling issues.

Based on Denison's recent ore schedule, Roca Honda's ore would only fetch $150 per ton, not including transportation costs (the article on milling mentions 25 cents per ton mile). That would translate to about $37 per pound. If it costs $20 to mine, you end up with $17 per pound, not counting transportation costs. The White Mesa mill is 280 miles away, which would mean roughly $17.50 per pound with Roca Honda's uranium grades and we're losing 50 cents per pound!

Fortunately, it doesn't work that way. With roughly 30 million pounds, Roca Honda would get a toll milling agreement, which is way better. Sumitomo/Strathmore would pay milling costs plus around 20%.

Here's an interesting article about milling in the Grants region of New Mexico, including details about Strathmore's plans for a mill.
In an email message, Strathmore Mineral’s David Miller told us, “We have now completed independent scoping studies for the Roca Honda Project.” A registered professional engineer completed an independent evaluation on the mill’s capital and operating costs. While the name of the engineer was not disclosed, Miller said, “This gentleman has 40-plus years of experience and has designed many mills in the U.S. and the world.” Miller told us, “Mill operating costs for various-sized mills range from the low $20/ton of feed to the high $200/ton of feed. The Roca Honda ore runs from five to six pounds per ton. Per ton-to-pound milling cost is at $30/ton operating cost (20 percent higher than the lower number in the evaluation) with a grade of five pounds per ton.”
So if Strathmore owns the mill, the milling cost is perhaps $10 per pound? Let's assume $20 per pound. So now we have costs of $20 per pound to mine and $20 per pound to mill. Tack on $5 per pound for transportation and whatever and we have a cost of $45 per pound. Of course...
Miller [from Strathmore Minerals] emphasized that milling costs could be as low as $6/pound of U3O8.
If the long term price of uranium remains above $80 per pound of U3O8, then Roca Honda would clear $35 per pound, 40% [oops 60%, see UPDATE below] of that owned by Strathmore which is $14 [$21]. Extracting 30 million pounds results in $420 million [$630 million] or over $5.45 [$8.18] per share. If the milling cost is only $10 per pound, then we're looking at $7 [$10] per share (that rolls in over a number of years).

That's just one property, although it's the best property.

NOTE: It should be clear from this simple exercise that the little players, the exploration companies that end up finding modest quantities of uranium in the middle of nowhere 300 miles from a mill are going to be worthless. Strathmore scooped up these properties early on, based on huge amounts of database information they own. Typical mining costs are going to be more like $50 per pound if you're lucky. Add in milling, transportation, and finance and there's no way they'll be able to operate without getting $90 per pound of yellowcake.

And then there's the mining in places like Khazakhstan with issues of infrastructure, corruption, and often political stability.

A lot of people talk about the uranium prices dropping to some low level like $30. The market prices are going to be set by the higher cost providers among a given level of consumption. In other words, how much does it cost to mine the 150 millionth pound?

The latest news articles talk about the excess supply in the spot market today, which means nothing.

UPDATE Aug 13, 2007:
An anonymous commenteer pointed out a mistake: Strathmore gets 60% rather than 40% in the Roca Honda deal (see the link in the comment).

Monday, August 06, 2007

Conforce International (CFRI) not in IICL list

In the latest issue of World Cargo News (Aug 06, 107), There's an article titled "IICL making progress on floors" (subscription needed or else you can buy the issue for $47).

The IICL is the Institute of International Container Lessors. They have a Container Flooring Project that was started in Dec 2005 "to tackle issues related to the quality, performance and availability of hardwood plywood and to investigate the use of alternative materials and flooring systems."

Conforce International (combined links) has recently had their composite flooring system certified for use in containers worldwide. But this was certified in late 2006.

CFRI's flooring has very good characteristics described in this conference call and here.

The article about IICL says that the primary aim is to reduce the amount of tropical hardwood used in floors by at least 50% [CFRI's certified solution uses no tropical hardwood]. Prior to a forum in Hong Kong in March, they tested five alternative designs meeting this 50% criteria. They tested both 20 foot and 40 foot containers.

One design was all-steel
Three designs used "omega sections" alternated with plywood.
One design used an "extended gooseneck tunnel".

The steel design passed the ISO 5,460 kg forklift test, but failed the more stringent ISO plus 33% test which most owners require. The steel design would need to be 6 mm thick, but this would be unacceptably heavy.

One of the omega section designs passed the test So did the gooseneck design.

IICL is planning to build 200 units (mix of 20ft and 40ft) of these two designs and run a field trial of deepsea and shortsea operations for 6 months.

The cost for these floors is "marginally higher" than a conventional plywood floor, which can go up to $300 in some locations. However, if the floors last a year longer, it will be worth the switch.

The plywood in these floorings can be non-apitong.

Here's the odd quote:
Though numerous "non-wood" floors have been developed, none has yet been able to meet the cost and technical requirements of the container industry.
That's not what CFRI is saying. They clearly have certification for their composite flooring.

Apparently, IICL is working with BASF to develop a workable composite floor. They're starting work with the specifications and a pile of plywood. This makes me nervous.

Quality of hardwood plywood floors has been deteriorating, as everyone knows. IICL has established a QA program with independent inspectors.

IICL is redrafting their Preferred Standards for Hardwood Plywood Floor Panels to "reflect greater understanding of enhanced test requirements and to cover multiple wood species, not just apitong."


BASF is obviously a major company. CFRI has claimed that their first-to-market advantage is significant, I certainly hope so. EKO-FLOR was too late for the IICL project, but hopefully the field trials in progress are going well.

Friday, August 03, 2007

China Expert Technologies (CXTI) conference call

"We now understand intimately how important the CFO position is within the public traded US company, especially one based in China."

UPDATE: Note that I have sold all my shares of CXTI.

CXTI combined links

UPDATE same day: The oddest thing happened when I was going through this conference call earlier. I had accidently pressed buttons which slow down the speed of the audio, causing the nature of the call to sound drastically different from what it actually was. I went back later today and listened again and was surprised to hear the entire call come out normally.

I've taken the unusual step of removing comments I had made based on my hearing of the slowed down audio. The comments were clearly a mistake. Sorry. In the pass through the call just now, everything was wonderful.

This is the first time the Chairman has engaged in a public discussion with investors. There was no Q&A, although there will be with the Q2 results conference call coming up in mid-August.

Here's what the latest 10-K has to say about Mr Huang Tao:
Before joining the Company, Mr. Huang worked for the Bank of China from 1981 to 2004. His last position was the Deputy General Manager of Retail Banking Department of the Headquarters. He was a member of Marketing Committee of MasterCard International (Asia Pacific Region) and the Marketing Advisor of Visa International (Asia Pacific Region) from 1998 to 2000. Mr. Huang has over 20 years extensive experience in banking industry and has established good relations with financial institutions and provincial governments in China. Mr. Huang holds a Bachelor Degree for English Language from the Nanjing Normal University and a Master Degree of Business Economy from the College of Graduate Students of the Chinese Academy of Social Sciences. His duties included business development in retail banking and personal banking, marketing and promotion and later the management of overseas branches’ business. He joined the Company in March 2005 and his duties include business development and marketing, as well as management decision making.
Here's what the latest 10-K has to say about Mr. Fu Wan Chung, "Simon"
Mr. Fu joined the Group in November 2005 and is responsible for the financial control and management of the Group. He was appointed as the Chief Financial Officer on April 19, 2006. Mr. Fu is a fellow member of the Association of Chartered Certified Accountants and holds a Bachelor Degree in Accountancy from the Hong Kong Polytechnic University. Before joining the Group, Mr. Fu worked for Innovative Information Systems Limited, a subsidiary of Itochu Corporation, as the Financial Controller from March 2001 to August 2005. Mr. Fu was appointed as Director of the Company on August 11, 2006.

Michael Huang
[Mr Huang begins in a very deliberate and quite capable English, which is not surprising. Regardless of his age, he strikes me as having the demeanor of a young, entrepreneurial person.]
Basic intro followed by an apology for the late correspondence. Mr Huang has been traveling both in China and in Europe on a business development trip [yikes, not more financing!] and he is actually still on the road as of the conference call. "While that's not a suitable excuse", he at least wants investors to know he's been working on CXTI related business.

As everyone is now aware, CXTI announced the resignation of the CFO on July 20. Mr Huang would like to provide "more color" and some detail about how they plan to move forward.

[Right here, Mr Huang becomes more animated and personal in his speech, in a careful and controlled way. I'm not entirely sure he was reading from a script as he seemed to pause at times that would indicate constructing the speech on the fly.]

"Simon was a valuable asset to China Expert. And we are very appreciative of his many contributions to our company during his tenure as CFO. Before I get into the specifics, I thought it might be helpful to provide investors with an introduction [garbled] experiences and current role at China Expert.

"I joined China Expert in March 2005 as the Chairman and Director at the company where I have been primarily responsible for business development and marketing, in addition to assisting with key management decisions.

[At this point, I'm beginning to like this guy: quiet, thoughtful, deliberate, well educated.]

"Currently, I am [an] independent director of a software company, Yucheng Technologies* [YTEC], based in Beijing, and , in the US on the NASDAQ. Prior to joining China Expert, I have held several positions including the Deputy General Manager of the Retail Banking Department of the Bank of China from 1981 to 2004, while also being a member of the Marketing Committee for MasterCard International for the Asia/Pacific region and a market advisor of Visa International for the Asia/Pacific region from 1998 to 2000. I'm a graduate of Nanjing [Normal] University with a Bachelor's degree in English and I hold a Master's degrees in Business Economy, Economics, from the College of Graduate Students of the Chinese Acadamy of Social Sciences. In total, I have over 20 years of business experience and plan on leveraging my background to take on the additional role of interim CFO at China Expert Technology until we can announce a new successor. Along with this increased commitment, I'll be allocating a significant portion of my time to China Expert's overall business, to help accomplish our stated objectives.

"As not only the Chairman and a Director, but also a shareholder, I'm truly despondent in the chain of events that have occured over the last week. Admittedly, we made a mistake by not working out an arrangement with Simon prior to appointing a new CFO. And secondly, by not hosting this call sooner.

[You'll get no complaints from me. These things allowed me to buy back into CXTI.]

"This transition period would have alleviated many investors' concerns and provided a more seamless integration process. China Expert recently decided to relocate our Hong Kong operations to Shenzhen, which is a part of Mainland China [as opposed to the Hong Kong Special Administrative Region which historically had been separate from China due to British colonization of the 1800s until the expiration of their lease in 1997]. The primary reason for this move was to manage the significant growth that China Expert has been experiencing for the past several quarters as evidenced by the signing of several large contracts. From a conceptual and practical standpoint, this makes sense for China Expert, given that all of our business is conducted with Mainland China, also our CEO, Mr Zhu, also primarily resides in Shenzhen.

"With the increase in new business wins, we believe this consolidation will help us to better control and manage [account these?] operations by providing one truly integrated company. This will facilitate improved interaction with both current and future government customers which we believe will optimize execution in addition to helping facilitate increase in future business for China Expert.

"Taken from a qualitative standpoint, we have historically accrued approximately 1.2 million US dollars a year in operating expenses directly from our Hong Kong office. This includes related office expenses, salaries for employees operating in a variety of accounting, mid-level manage [ego??] and support functions. We believe we will replace these employees with staff well versed in both PRC contract law and business practice at a significant cost savings.

"Our organization, which includes 50 full-time employees, in addition to numerous consultants and sub-contractors will collectively fulfill these obligations in the near term while we [plan?] and train new team members. Given the strength of the Hong Kong market pressures, my belief is that our former employees will find new business opportunities suited for very skilled [deaths? That's what it sounds like. Geez!] And we plan on completing these relocations by the end of August to our current location, located, which will take place at our current office location, located in the development center of [Ruminanbro?], Shenzhen, People's Republic of China.

[I'm guessing these layoffs were very painful.]

"As it relates to naming a new CFO at China Expert, we are actively interviewing three qualified candidates and I'll personally meet with all of them in the coming week. We now understand intimately how important the CFO position is within the public traded US company, especially one based in China. [I had the pause the call here the first time to stop laughing] Whereas [the] senior management team is not bi-lingual, our goal is to have this person retained as soon as possible.

"But we are also confident that having the right person in place in [???], the applicable person will possess a strong accounting background including GAAP experience and some knowledge of business operations, will be bi-lingual [have capital market experiences?] and will be capable of serving as a public liason to [communicate] with investors, attend financial conference and road shows. We'll look forward to providing investors with an update as this negotiation progress. Until this new person is retained, I will be taking the responsibility of signing off on all related financial statements and will be working closely with our internal accounting and financial teams in addition to our outside auditors to ensure accurate and timely reporting.

"In addition, several of you met with Mr. Song Feng [COO] during his February visit to the US. I want to mention that he did not proceed with the new employment contract which came up for renewal at the end of May. Now our CEO, Mr. Zhu, has been carrying for [COO's] responsibility and obligations. And in our most recent, most recent press release, we provided preliminary 2nd quarter results. I want to mention to investors that these are preliminary results which have not been formally reviewed by our auditors. We will provide more specific operating results and guidance during our 2nd quarter 2007 conference call which is expected to be no later than August 15. [garbled stuff here] I will reiterate again, I see no reason why we will not be able to file our 2nd quarter 2007 results by the mended, mandate deadline.

"In addition, I want to assure shareholders that there'll be no discrepencies in the financial statements previously filed with the [SEC] which we understand has been a recent concern of many shareholders.

"In conclusion, while these have been difficult times, I look forward to keeping an open dialog with the investment community and our shareholders on a go forward basis as we continue to execute against our business' plan, the entire management team continues to believe that the e-government opportunity is still in its infancy as major agency and [manicifully?] look to outfit their current, antiquated infrastructure to improve efficiency, transparency, while better serving those living in their jurisdiction. During the past several months, we have announced several significant news, including contracts in two provinces outside of Fujian which are initiating e-government development, thus diversifying our business. This has been a major initiative and I'm pleased to see the results of our entire team's collective efforts paying off.

"Let me reinforce that the entire management team of, at China Expert is intent on [maximizing] shareholder value. Both the CEO and I have a strong personal interest in maximizing shareholder value because we are all shareholders. We understand that building shareholder value is a process and a combination of [urgent?] business decisions, execution and a [conificominication???]. We look forward to providing updates on these objectives as we strive to attain both our short and long term goals. And thank you again. I look forward to interacting directly with investors on our upcoming 2nd quarter conference call. Thank you again."

And that's the end of the call.

* thanks to mkoza1 for identifying this company.

Wednesday, August 01, 2007

China Expert Technologies (CXTI) Q1

CXTI combined links

10-Q for Q1

Period ending March 31, 2007
32 million shares on April 30, 2007

Balance Sheet

Cash is up to $21 million from $10 million
AR is down to $31 million from $34 million
Cost and est earnings in excess of billings is way up to $3.9 million from $782K
Prepayments are down to $12 million from $19 million

AP increased to $1.2 million from $253K
Amount due a former officer increased to $2.2 million from $1.8 million

Additional paid-in capital actually dropped by a million. That's odd.

Income Statement

Revenue is down to $13.2 million from $15.1 million yoy.

Let's check out the quarterly revenue variation (page 28):
Q1 2005: $8.7 million
Q2 2005: $8.3 million
Q3 2005: $9.0 million
Q4 2005: $9.5 million
Q1 2006: $15 million (wow, why the big just here?)
Q2 2006: $14 million
Q3 2006: $19 million
Q4 2006: $17 million
Q1 2007: $13 million
The decrease in revenue is mainly because several projects were substantially completed last year, namely Jinjiang (3rd and 4th Phases), Dehua (4th Phase) and Nan’an (1st Phase). Although the Company commenced two new projects during the period, namely Licheng and Shishi, the contributions to revenue were limited during the start off period.

3 months ended
March 31







Cost of Revenue



Gross Profit



Advertising and marketing expenses



General and administrative expenses



Change in fair value and amortization of stock based prepaid expenses



Interest expenses and finance costs



Change in fair value of derivatives



Income before income tax



Income tax expenses



Net Income



Ok, so the things that jump out here are:
1) The big jump in advertising and marketing expense. It went up in absolute amount as revenue went down. Not surprising in the sense that the two are very independent of each other. They spell out the various commission payments.
2) The big drop in G&A expense. This was due to a lack of stock issued to employees and a lack of liquidated damages to investors.
3) The increase in gross margin (due to less subcontracted work).

Cash Flow Statement

The drop in AR was offset by the increase in costs and est earnings in excess of billings.
The $6.7 million drop in prepayments dominated the operating cash flow.
The rest was net income.
Operations generated $10.7 million, largely because of the pipeline effect of contracts and work... finally.

Capex was $128K vs $2.2 million depreciation.
No other investment.

Finance was entirely the advance and repayment from/to a former officer.

$7.9 million contract costs
$4.2 million consultant fees

1.5 million convertible debentures
4.1 million dilutive warrants
2.2 million anti-dilutive warrants
6.5 million total warrants

Subsequent to Q1, all the debentures have converted: 1.4 million shares. Not sure if these are counted as part of the 32 million (probably yes). I'm still OK with assuming 45 million totally diluted shares.

CXTI won a major contract outside of Fujian: $42.4 million in Xi'an City in Shaanxi, the same city I covered when I looked at CHLN. This is a major western city. Work starts in Sept 07 and should end in Mar 2010.

There's $257 million in outstanding contracts, up from $228 million at year end 2006.

China Expert Technologies (CXTI) 2006 10-K

CXTI combined links

I bought into CXTI starting July 20 and continuing into July 26. They've been doing extremely well at landing new contracts and when the CFO resigned, I believe the market way overreacted.

I'm leaving out a lot of stuff that I've covered in previous 10-K reports.
Year ending Dec 31, 2006.
31 million shares on March 15, 2007.

Jan 8, 2007: CXTI amended SEC share registration for 11.6 million shares (amendment number 3) from the various financiers. There was another amendment for 16 million shares in June 2006, an SB-2 amendment around the same time for the same shares (SEC form description). S-1 is the form for the initial registration of shares while SB-2 is for subsequent shares, although it's the small business version? covered by the prior S-1?

I've covered the history previously, including the toxic convertibles (now gone).

Jan 8, 2007, CXTI filed an amendment to their S-1 securities registration to sell up to 11.6 million shares related to the convertibles and warrants.

57 full-time employees on Dec 31, 2006. 24 permanent, 33 contractors.

Various types of bidding on e-government contracts
open bidding on a website
invited bidding (Jinjiang project was invited) seems to involve more close up-front work between CXTI and the government

CXTI will sometimes prepare a feasibility report covering whether the city is suitable to construct an e-government system. CXTI does a site visit, gathers info, and advises the city.

CXTI has issued a lot of shares to consultants for a variety of areas of work. There's a continuing relationship with Macro Business Limited ("Consultant") started in Feb 2004. CXTI agreed to issue 1.1 million shares for sourcing contracts. When the Consultant gets a successful contract, CXTI pays out 15% of the gross contract amount. in cash or stock (CXTI's option).

In June 2005, CXTI made an agreement with Zhao Wei of China e-internet Technologies Ltd: 1.1 million shares for sourcing the Huian County contracts. Other contracts pay 10% of gross amount.

In Jan 2006, CXTI made an agreement with e-Internet Technologies Ltd: 1.2 million shares for sourcing the Licheng District contract and related preliminary work.

In March 2006, CXTI made an agreement with FuJian Internet Consultants Ltd: 15%, payable in stock.

Nov 2006, agreement with Cangshan Science Park Huada Electronic etc. etc. Company. This pays only 4% of the contract total, much better terms for CXTI. Paid in cash, $600K.

Nov 2006, agreement with Minqing Jin Nua Information Technology Co Ltd. Sourcing in Minqing County of Fuzhou City in Fujian. Pays 5%. $1.3 million cash paid.

Dec 2006, agreement with Quanzhou Guo Guang Scientific etc. etc. Company Ltd. Sourcing in Quangang District of Quanzhou City in Fujian. Pays 6%. $1.9 million cash paid.

Dec 2006, agreement with Pingtan County Shun Wei Information Technology Company Ltd. Sourcing in Pingtan County of Fuzhou City in Fujian. Pays 5%. $1.2 million cash paid.

Dec 2006, agreement with Fuzhou C.H. Network Science & Technology Ltd. Sourcing in Mawei District of Fuzhou City in Fujian. Pays 4%. $900K paid.

Dec 2006, agreement with Yongtai Jia Zheng Consultants. Sourcing in Yongtai County of Fuzhou City in Fujian. Pays 5%. $1.5 million paid.

CXTI prefers to pay these consultants in cash whenever possible. Consultants, you ask?
The Company would use independent consultants who are not employees of the Chinese Government but have tides and knowledge of the local cities where they have citizenship to explore opportunities in new cities. The costs of using these independent would be the amount of commission, usually payable in shares of the Company’s common stock or cash, paid to these consultants.
There's a lot of gray area where you need to get the ear of the right people who have connections with people with influence etc. I have a tangible fear that there are kickbacks involved.

Now let's see if any of the risk factors are unexpected. They're still saying they only have 12 cities out of the total 82 in Fujian, which is good since it leaves room for more business. I thought they had one contract outside of Fujian, perhaps that was after Dec 31. [down on page 23 they mention that Yinzhou District, Ningbo City is outside of Fujian].

The tax rate is increasing from 15% to 25%.

800K shares were reserved in the stock compensation program of Jan 2006. Nothing else.

Chart of fianancial results since 2002:
Revenue [net income, per share]:
2002: $1.25 million [loss $950K, 5 cent loss]
2003: $5.67 million [$1.2 million, 6 cents]
2004: $26.8 million [$4.8 million, 20 cents]
2005: $35.6 million [$6.5 million, 26 cents]
2006: $66.1 million [$7.8 million, 22 cents] [we'll see below that I think this is more like 50 cents]

CXTI focuses on second tier cities (Beijing and Shanghai are first tier cities and multinational companies have already been making inroads there). CXTI tailor makes solutions more than multinational competitors (not sure I totally believe that).

There's a problem in expanding outside of Fujian. Here they're saying they have 12 out of 25 cities in Fujian (not 85), but the 25 number are cities that are estimated to be suitable to apply CXTI's e-government systems. Even then, some of the 25 might not end up being suitable.

CXTI needs to expand outside of Fujian. This is a top priority.

14 new e-government contracts were won in 2006 representing $252 million. They started the Jinjiang training and maintenance phase, which was a phase I had worried about being underestimated.

At the end of the year, they had $228 million outstanding in contracts.

Year ended
December 31






Cost of Revenue



Gross Profit



Advertising and marketing expenses



General and administrative expenses



Amortization of intangible assets



Interest expenses and finance costs



Loss on extinguishment of debts



Change in fair value of derivatives



Income before income tax



Income tax expenses



Net Income



Revenue is up due to new projects.
Gross margin is up due to less subcontracted work
Advertising and marketing included all those consultant fees mentioned above. This will continue.
G&A percentage increased due to stock issued to employees, also liquidation damages to pipe investors.

Note that the fair value of the stock issued to consultants is repriced over time, if I understand correctly. This would cause silly fluctuations in costs. This will also tend to cause oscillations in stock price, in my opinion.

Financing costs were pretty high due to the debentures of Oct 2005 that drove the stock down to around 80 cents at that time. Also, when they amended the debenture terms in Oct 2006, they had a $504K loss on extinguishment of debt, which would have been this.

There was a $3.1 million expense from change in fair value of derivatives, which I consider to be a perhaps misleading charge. I'd prefer a realistic estimate of value at the time the derivatives were created and then amortize that charge over the (expected) lifetime of the derivatives.

The overall net margin decrease (to 11.87% from 18.28%) was due to the sourcing fees, employee stock, liquidated damages payment, convertibles financing costs, and other stuff.

Revenue recognition is using the percentage-of-completion method. Losses (when revenue isn't expected to cover costs) are recognized immediately. Lots of judgement needed here, watch for any losses in early projects.

I covered the 1-year warranty period issues long ago.

Zhu Xiao Xin, 41, CEO since 2004, owns 33% of the stock (along with others)
Huang Tao, 44, Chairman since 2005, owns 7.42% of the stock
Fu Wan Chung, Simon, 39, CFO [who just left the company in July 2007] since April 19, 2006, owned no stock.
Song Feng, 43, COO since 2004, owned 285K shares of stock.

Fu Wan Chung, Simon:
Mr. Fu joined the Group in November 2005 and is responsible for the financial control and management of the Group. He was appointed as the Chief Financial Officer on April 19, 2006. Mr. Fu is a fellow member of the Association of Chartered Certified Accountants and holds a Bachelor Degree in Accountancy from the Hong Kong Polytechnic University. Before joining the Group, Mr. Fu worked for Innovative Information Systems Limited, a subsidiary of Itochu Corporation, as the Financial Controller from March 2001 to August 2005. Mr. Fu was appointed as Director of the Company on August 11, 2006.

The salaries are extremely low. The highest total compensation is $42K.

All officers and directors own 41% of the stock.

Audit fees were $187K (vs $115K for 2005). Tax fees were minor.

Auditors were BDO McCabe who I covered here. Unqualified audit opinion.

Cash increased to $10 million from $7.3 million, but I know from the discussion that it's not from operations.
AR increased to $34 million from $15 million! Later on in Q1, this gets slightly better at $31 million.
Prepayments jumped to $19 million from $10 million!

Amount due to a former officer increased to $1.8 million from $850K.
Tax payable increased to $1.1 million from $642K and deferred tax liabilities increased to $471K from around $100K.

There are big derivatives liabilities in the balance sheet due to the convertible debentures.

Equity jumped to $59 million from $21 million, somewhat due to retained earnings, but mostly due to additional capital associated with the derivatives.


Revenue changes:
2004: $26.8 million
2005: $35.6 million
2006: $66.1 million

The rest is covered above.


Started the year with 26 million shares and $21 million equity
2.3 million issued for sourcing contract(s)
844K issued for convertible debentures
800K issued for employee compensation
184K issued for debenture interest
614K issued for liquidated damages
Ended the year with 31 million shares.


Operations burned $1.7 million in cash despite earnings of $7.8 million.
AR increased $17.7 million
prepayments etc. increased $14.3 million (these are the cash commission payments and prepaid contract costs)

non-cash stock compensation of $8.6 million
non-cash charge fair value of derivatives $5.4 million
non-cash amortized finance costs $4.2 million
non-cash charge for change in fair value of derivatives $3.1 million

$3.7 million increase in cash due to refund of a deposit for acquiring a subcontractor, which can explain the entire increase in cash.

$1.5 million sloshed back and forth with a former director


Depreciation schedule:
Furniture/fixtures/office equipment 5 years
Computer equipment and software 3.3 years
Cars 3.3 years
Leasehold improvements 3.3 years (or lease term if shorter)
These seem good for a Chinese company (CEDA in particular)

The P&E is currently fairly evenly split among these groups. It's nearly entirely depreciated.

Cost of revenue is subcontracting costs, labor, and costs by those directly working on the contracts

The related party transactions with a former officer involve cash advances in both directions. Interest free, repayable within one year.

Also, there's a rental agreement with the same guy and he sold a car to the company for $23K, this was all back in 2005 and 2004.

The "toxic" convertible debentures are old news and I'm not going to cover them again.

Taxes are often a good double check against claims of income. These are the current PRC tax expenses for each year.
2004: $1.8 million
2005: $2.4 million
2006: $4.9 million

3.76 million options/warrants/convertibles that are anti-dilutive.
6.6 million outstanding warrants.
31 million shares outstanding
I don't have the information needed to compute fully diluted shares, but I'll make a guess at something like 45 million totally diluted shares.

So net income per share assuming 45 million shares would need to back out the various non-cash charges related to stock, which I figure is around $17 million (look at the related modifications in operating cash flow*). If we add that to the $7.8 million net income, we get $23.7 million. If we divide that by our totally diluted 45 million shares, we get around 55** cents per share. The statement claims 22 cents per diluted share.

** I find this 55 cent number suspicious because it's hard to believe the non-cash expenses would be that much higher than my method of assuming the worst dilution and backing that stuff out. I must have made a mistake somewhere or else didn't count some expense. Then again, the huge increase in the stock price will cause a huge GAAP accounting expense, if I understand correctly.

A good double check is the operating income which increased from $14 million in 2005 to $21 million in 2006, and that's even after the big jump in G&A due to the consultants' sourcing fees (much of which includes stock compensation).

* stock based compensation related modifications to operating cash flow
Change in fair value and amortization of prepaid consultancy fees: $5.4 million (these are the non-cash related ones, cash charges are simply... cash)
Expenses compensated by common stock: $8.6 million
Change in fair value of derivatives: $3.1 million


Looks pretty solid. They really need to expand outside of Fujian very soon. I think a realistic view of earnings are much better than the GAAP number, perhaps more like 55 cents, but I might have made a mistake in overestimating the stock based expenses on the income statement or missing something else.

It's easy to worry that all the e-government work will complete all over China and leave CXTI out in the cold. But does anyone believe that government computer IT work will decrease going forward in time? Especially for a control-freak sort of country? I think not.

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