Pink Sheets

Washington Gas Light Company (WGL, WGLCN, WGLCO, WGLCP, website, sec, yahoo, chart). Ok, so I had considered this a pointless exercise back on March 17, 2007. Let's see if that might have been proven wrong yet.

The long term price chart of the preferred stock still hasn't wiggled around enough to be interesting. The common stock WGL also has gone nowhere.

So far, so pointless.

DAC Technologies (DAAT, sec) They make gun cleaning equipment for Wal*Mart. Vendors should fear Wal*Mart as should their investors. If someone's going to get squeezed, it's going to be the vendors. That's why I've been skeptical about this stock. Keep in mind they had to restate some 2006 results. Q2 results: 6.1 million shares. Inventories are 63% of total assets! AR is 17%, so inventories+AR is 80% of assets! Current ratio is about 2. No significant long term liabilities. Over half equity.

Six Month Results: Revenues are flat. 30% gross margins. 5.6% operating margin. Less than 1.8% net margin. Earned 2 cents diluted for the quarter. SG&Q increased yoy, knocking off 3 cents for the half.

Inventories ate up operating cash flow. They factored about $2 million of receivables. AP helped out cash flow. Capex (effectively on borrowed money) was above depreciation, but both are relatively small.

The Company continues to fight the effects of rising commodity prices on its gross margins.. Gross margins did increase during the second quarter of 2007 to 32% as compared to 29% in the second quarter of 2006.

The Company’s line of GunMaster™ gun cleaning kits continues to be a leader in the gun cleaning market. However, it is becoming increasingly difficult to maintain the tremendous sales growth experienced in this market from 2003 through 2005.

They increased prices to customers in Q2, which is a very good sign (and also an anecdote for the overall inflation picture).

CEO leases part of his Miami home to the business as an office.

This stock doesn't seem all the great. Earnings for 2006 were 12 cents. 2005 earned 10 cents. Maybe the stock is worth $1.00 in my opinion. It might be interesting at 50 cents. The last sale was $1.11.

Harbin Electric (HRBN, sec, website). The stock is up to $14 since I last looked at it on April 28, 2006. Q2 results: 16.6 million shares, about 19 million fully diluted. $25 million net cash. Other significant assets are PP&E, advances on equipment purchases, and AR. Around 2/3 equity. $31 million long term debt with a massive $19 million discount. What's up with that?

Revenues up around 44%, although this may be slowing. Over 50% gross margins! 39% operating margins. Huge interest expense just started showing up recently. Debt discount being amortized at $1.1 million per quarter. $757K non-operating income this quarter (not much last quarter). No taxes. This all needs some "color" to know what's going on here.

Cash flow from operations is a bit less than net income due to AR/inventories/advances which is largely offset by the non-cash debt discount amortization. Capex is $861K vs $209K depreciation.

A huge chunk of advances fall into the investment cash flow category.

Here's the cash flow story for 6 months: Operations generated $7 million on $27 million of revenue and $8 million of net income, much of that income was in Q2. Operating assets increased by $4 million. Around $12 million was invested in advances on equipment. $1 million went into a currency hedge deposit which has brought back around $300K in cash. Total cash dropped from $67 million to $63 million.

Very few options/warrant exercised. Very low allowance on AR.

This is worth more investigation if/when it falls below $12 per share. Right now it's about $14, so it doesn't seem cheap enough, although once again, I get a sense that it will do well over the long term. I should really be taking a better look to find new-school-Buffett type stocks that have very good long term characteristics. I really missed out with MTW. I knew it was very solid back in 2000-2002, but "it wasn't cheap enough." Early 2003 was the perfect chance to scoop it up at a low point for a nearly 10-bagger. Damn!

worth following

A dusty man in a cowboy hat steps up into a dusty pickup truck with all sorts of strange pieces of equipment in the back.

"Pssst! Hey mister!"

The man looks back and sees a kid pulling a wagon with a bunch of rocks in it.

"Wanna buy some core samples?"

"Huh? No, thanks."

"I'll throw in these old papers along with it."

Curious, the man looks at the papers. "Holy cow! This is the legendary Gas Hills database the old Seventy-Niners talked about back at the old Disco Mine. How much do you want for this stuff?"

"fif' thousand for the whole wagon load."

"Kid, I'm being serious here."

"So am I. The Denison guys are gonna give me forty-kay for it as soon as they get back."

"Ok, look kid, I don't have that much cash right now, but I'll give you twenty thousand shares of Strathmore Minerals stock for it."

"Let me check my Blackberry here... just a sec... that's on the Canadian exchange, right?"

"Yeah."

"Make it twenny five!"

"Deal!"

Strathmore Minerals Corp. ("Strathmore") (TSX:STM - News) has agreed to issue 25,000 common shares to an arms length party to acquire a geological data base in the Gas Hills area of Wyoming.

Ok, so maybe it didn't go like that. But they provide almost no information about who sold it, why, how they happened to run into it. There's another odd press release today, as well.

Strathmore is buying another property in the Grant's Uranium District in New Mexico. No price mentioned. Seems to have maybe 9 million pounds at 3 to 4 pounds per ton. Probably needs an underground mine. More ore for the mill.

Meanwhile there's all sorts of conflicting speculation about the future price of uranium. No one knows. But one thing I do know is that no one in the past two and a half years has refuted the basic thesis of investing in Strathmore. Anyone who's read The Black Swan knows that doesn't mean that much.

Now that my 2nd investment in CXTI has gone bad, and CFRI is down by about 50%, and Strathmore is down (but admittedly still up over 50% from where I bought it*), there's really no evidence on this blog that my investing is successful and any assumptions that I'm any good at this are an exercise in faith and not empirical evidence. Keep that in mind.

Despite all that, I'm actually optimistic based on what is happening with the business I currently own. I've rolled the remaining cash I have into NICK. I went back and looked at CEDA since it's a Chinese reverse merger (I've now seen too many of these go bad). I'm still OK with it. I also looked at Conforce again; I hadn't posted anything about the Q2 results, which were ok. We should start hearing about the field trial results before long. CVU's results are still in a holding pattern: they've scaled up the operating capacity, but the business is scaling up more slowly. And I've never been more confident about Strathmore Minerals.

How about stocks that I dumped in the past?

LVWD: about the same at 55 cents (but that's after a quick 37% gain), losing money.
EPLN: down significantly from where I sold it. Results aren't very good.
YHGG: down significantly from where I sold it.
BOJF: down somewhat.
BKBO: as far as I'm concerned, the jury is still out on BakBone.
ETLT: you could argue that the jury is still out on this one as well, it's up slightly.

* I suppose since I'm leaving out lots of net gains from before the blog, that to be fair, I should actually claim a 100% gain on Strathmore from where I first mentioned it on the blog.

DUMPED THE STOCK, SEE THE UPDATE BELOW.

I had decided against buying China Expert (sec) at $1.50, but when it fell below $1.20, I bought some more shares. Not a whole lot. I'll probably buy more when it drops below a dollar unless something terrible emerges, which is always possible.

High risk / high reward. The decisions I'm making with CXTI(E) require a lot of balancing of these two. I figure disasters can kill you if you're too cautious or too aggressive. The first case is less obvious, but it's due to chopping off the good long tails while not being able to sufficiently chop off the bad long tails.

UPDATE after the close:
Well, I didn't expect it to go under a dollar on the same day. The thing is that I won't have much additional cash to invest for perhaps another month. This is definitely getting interesting. Probably the worst thing to do now is try to predict what's going on inside the company. I have some ideas, but I try to avoid fixating too much on any one thing. Perhaps the new CFO is not sufficiently competent at GAAP accounting and they're finding out the hard way. Perhaps the prior CFO screwed up the books: inadvertantly or perhaps even intentionally. Perhaps the auditors have all sorts of issues that came up during the review. Perhaps there are ominous legal issues with the commission fees. And then you can never rule out a true smoke-and-mirrors wholesale ACLN-style fraud. Although I consider that unlikely, there are plenty of other unpleasant outcomes just the same. The key is which ones would result in the stock not going back up to some reasonable price. I find that I'm less worried than I was with ETLT. Ok, so that's the risk side of the equation.

On the reward side, the stock could easily be a ten-bagger from here. The current stock price is uniquely low due to two major independent factors (but perhaps more). The first is the CFO/COO loss combined with the late filing, the lack of communication, the resignation of the IR company, the perhaps poorly timed move to Shenzhen, and any other fumbling I might have left out. The second factor is the hedge fund meltdown. Watching JLF selling batches of shares on an almost daily basis, I have to wonder how many other hedge funds are puking up shares to fill redemptions. Along with the hedge fund problem is a general overall flight away from risky things. Both of these things just happened to strike at the same time. There may be something in addition to these, I don't know.

Mr. Market is playing one hell of a poker hand with this stock.

UPDATE a few minutes later:
I just noticed that there were 2 million shares that traded right at the end of the day. Someone had to search for a buyer for that many shares. At 4.77 million shares, this might have been the highest volume day ever for the stock (or close to it).

UPDATE again same day:
JLF continued selling small amounts of stock last Thursday at $1.81 and Friday at $1.52 (which I interpret to be essentially a forced selling). I wonder if that was him today dumping the rest of his 4 million shares. If so, then buying a modest amount today was definitely the correct move, regardless of what happens to the stock going forward.

UPDATE 9:55 AM, Wed Sept 12, 2007:
I'm out. I sold all my stock this morning at a big loss. CXTI is MIA. No one can find them. Weighing everything, I decided to bail. I could be wrong, just as I could have been wrong holding the stock. Time will tell.

UPDATE 5:30 PM, Wed Sept 12, 2007:
Looks like that was JLF selling millions of shares on Monday: 2.66 million. I suspect he's probably sold the rest of the shares by now (1.6 million). But I bailed out today. When I said "no one can find them", I mean that I have yet to hear of anyone who has tried to CXTI management that was able to locate them. If you've had contact with them in the past week, then feel free to email me with the results.

UPDATE Mon Sept 17, 2007:
The CXTI Chairman resigned from the YTEC board. Let's see: the CFO left, the COO left, the auditors left, the big players (JLF and Pike) sold their stock, the offices are reportedly closed, the phones are being staffed by people who don't seem to know anything, the Chairman resigned from his sole board role outside of CXTI. I'd say my decision to sell was correct. The decision to buy is another story.

UPDATE Tue Sept 18, 2007:
Well, it looks like Simon Fu won't be on the board at CNCA after all.

Simon Fu, who was slated to assume the role of Chief Financial Officer of HLS following its acquisition of HollySys, has notified the company that he has decided not to accept the position, citing personal reasons.

The reality of these things is that you never really know which side made the decision, Simon or the company. If I were a betting person, I'd bet on "the company."

So the CXTI Chairman unexpectedly left the board of YTEC and now Simon Fu unexpectedly doesn't take the position at CNCA. CXTI now has more red flags than a May Day parade in Tianamen Square.

UPDATE Sept 19, 2007:
Here's a very interesting interview with Simon Fu over at Fair Investing.

...and the New York Post publishes a story.

but I'm a superstitious man, and if something should happen to any of these executives, then I'm going to blame karma.

Advanced Battery Technology (ABAT). Q2 results: AR way up since the 10-K, so is AP. The business is probably ramping up. paid-in capital decreased, but then I noticed a bunch of restatements, probably screwed up accounting. Equity is way up, regardless. Revenues for Q2 and H1 have more than doubled yoy. 48% gross margins. 43% net margins. Wow. Earned 7 cents per diluted share for Q2, 9 cents for the half. I'll bet the stock price is doing very well. Operating cash flow stinks all to hell mostly due to AR. They show "collection on loan to related parties" as cash flow from investing. Pretty much all the non-operating cash flow is small. Max of 8 million possible stock options with 50 million shares outstanding.

I had said that 2007 results would be a wildcard. The stock was at $2.75, "probably a good price, but not cheap enough."

During 2006 we began to realize the benefit of our capital investment, as our total revenue for the year quadrupled to $16,329,340. That growth continued in the first six months of 2007, as our revenue grew to $13,049,083, a 157% increase from the $5,084,449 in revenue realized in the first six months of 2006. Based on results to date and firm orders already in place, we expect that in 2007 we will substantially exceed the revenue level we realized in 2006.

Ok, I believe you. I have no idea how much they will continue to grow. It's probably worth at least $4. The current price is $3.65.

Berkshire Hathaway (BRKA, BRKB, sec) Not exactly a pink sheet stock. Berkshire has been continuing to buy Burlington Northern (BNI), including call options (ok, that's actually National Indemnity buying them, not sure is Lou Simpson controls that part of the float). It's one of those long term trend plays. Q2 results: 1.54 equivalent A shares. Needless to say, the balance sheet is rock solid. There's probably about $30 billion in excess cash that Buffett would invest instantly if he found something good. Given the turmoil lately, I think it's very likely that he's found something or will find something good. If that happens in a big way, the value of Berkshire is going to quickly look a lot better: a few years would likely add another $30 billion (around $20k per share). It's fairly meaningless to try to pick apart Berkshire's value based on a single quarter. These recent quarters have gone very well. The best time to buy Berkshire is when things look bad, like back in early 2000 when the stock was selling for under $50,000 and it was trying to deal with the massive General Re problems. Let me tell you, people were seriously worried, just go back to the Motley Fool message board around that time. Lesson to be learned: good businesses with good management find a way to recover from big problems.

Let's view each Berkshire A share as having two parts: $100,000 for ownership in the businesses and $20,000 cash in the hands of Warren Buffett who is now at the peak of his investment capabilities. For the past 6 months, the company had $3,700 earnings per A share. While that might be a sunny day result, I'd actually be fine with slapping a P/E of 15 onto that, given the set of businesses Buffett has put together (I think earnings will get there on average before too long). That would result in a value of $111,000. The $20,000 in Buffett's hands, I'd say is probably worth around $30,000 given Buffett's skill vs age vs the disadvantage of dealing with tens of billions instead of just millions. So I figure the stock is probably worth around $140K per A share. Not cheap enough for me.

Across America Real Estate (AARD) I wrote, "These people develop retail commercial real estate for stuff like Fedex/Kinkos, gas stations, Starbucks, car washes, Grease Monkey, etc." Q2 results: cash is up about 60% from year end. The amount of real estate held for sale has gone up to 18% of total assets. Half of assets are land held for development. Equity is only 14% of total assets, not all that far from bank levels of leverage and probably nowhere near the stability. Revenues are extremely lumpy, but they seem to be fairly good at losing money. I have no idea what this is worth.

Table Trac (TBTC) This is the very small company doing casino automation. Q2 results: Balance sheet looks ok. Woah, revenues are way up, most of that is this most recent quarter due to an installation in Oklahoma (note that one of my early complaints about the company was that too much revenue was one-time at installation and not recurring). In Q1 they finished up a casino setup in Nicarauga. They earned 7 cents (both quarter and the half). Operating cash flow is negative due to AR. No financing, no investing. 9 casinos are 90% of their revenues.

Perhaps, most significantly, we have been successful with integration and full functionality of our system with the multiple class II vendors in Oklahoma. Accordingly, this achievement has been recognized and has led to additional sales and many requests for new system quotations. In April we closed our second sale in Oklahoma to the Ft. Sill Apaches. We have most recently closed on our largest systems sale to date with the Otoe-Missouria (a two-phase contract), and currently have more quotes under consideration. The Company recently returned from our busiest trade show ever, the OIGA (Oklahoma Indian Gaming Association). On the international front, we contracted on a three-casino development deal in Costa Rica in June, and on July 19th, we signed a Master License Agreement with Thunderbird Resorts, providing exclusivity terms to them in exchange for minimal purchases. They currently have 35 casinos. The company is increasing revenues and earnings, and we anticipate this trend to continue.

Hmmm. Let's say they end up with average earnings of 12 cents per share per year. Due to the one-shot nature of the business, we give them a P/E of 9, for a share value of $1.08 (I'm not cheating here, I haven't looked at the stock price yet). The stock price is $2.08. It's gone up quite a bit since I first looked at it in Dec 2005:

At 70 cents on the ask, I just don't think it's a good investment.

Yeah. I could be wrong about that.

Big trends are often unseen. One of civilization's greatest milestones happened within the last year or so without any real fanfare. For the first time in 10,000 years, farming is not the dominating industry in the world. Interestingly enough, this happened at the exact same time when China ended its 2,600 year old agriculture tax.

I think this is huge news and it says a great deal about where the world is heading. I believe that one of the most important changes happening today is the creation of a gigantic global middle class. I also think that this will have a huge impact on the global economy, creating massive amounts of wealth worldwide and also increasing the speed and volatility of change.

The ratios are changing rapidly. Industry, which is now extremely productive hasn't absorbed all the people because there's only so much room for people to work there. Instead, the global masses are moving directly into the services sector.

Worldwide, in 1996 agriculture employed 42%, industry 21%, and services 37%. In 2006, the numbers are 36%, 22%, and 42%. So in the period, services has overtaken farming on a global scale.

In most of the West, we've long since increased agricultural productivity so much that only about 3% of our population works in farming. A hundred years ago, that was more like 30%. During the 20th Century, the big shift in the US was all those farmers moving into industry. Today, the farmers are skipping industry and moving directly into the services (UPDATE: or perhaps they're moving into industry while those in industry move into services).

What happens as that trend hits in China, India, Bangladesh, Indonesia, etc.? Small-time unproductive farmers are part of Nassim Nicholas Taleb's "Mediocristan" (from the book The Black Swan). When those people join the services sector, they move into "Extremistan". When they were farmers, their activities and output didn't change very much, except over very long time frames. When they become service workers, their activities can shift unpredictably into new areas at a relatively rapid pace. And when you have a gigantic middle class, things can scale up to unprecedented levels. For instance, a breakthrough in cellphone technology scales up to billions instead of millions. This sort of massive scaling potential produces "Black Swans". And that means interesting things for the investment world.

UPDATE Oct 9, 2007:
A Wall Street Journal editorial notes that a new UN report says that:

"People around the world are becoming healthier, wealthier, better educated, more peaceful, more connected, and they are living longer."

The editorial adds:

It also turns out that the Malthusians (who worried that we would overpopulate the planet) got the story wrong. Human beings aren't reproducing like Norwegian field mice. Demographers now say that in the second half of this century, the human population will stabilize and then fall. If we use the same absurd extrapolation techniques demographers used in the 1970s, Japan, with its current low birth rate, will have only a few thousand citizens left in 300 years.

Amazingly enough, the UN admits to the cause of a massive improvement in the human condition:

To what do we owe this improvement? Capitalism, according to the U.N. Free trade is rightly recognized as the engine of global prosperity in recent years. In 1981, 40% of the world's population lived on less than $1 a day. Now that percentage is only 25%, adjusted for inflation. And at current rates of growth, "world poverty will be cut in half between 2000 and 2015" -- which is arguably one of the greatest triumphs in human history. Trade and technology are closing the global "digital divide," and the report notes hopefully that soon laptop computers will cost $100 and almost every schoolchild will be a mouse click away from the Internet (and, regrettably, those interminable computer games).

Back in the 1960s, I clearly remember the gloom and doom. The population explosion. All the horrible ways the world was going to end by the year 2000. Lots of people really believed it!

I recall at one point, Lake Erie was declared dead: with all fish and water critters gone. The US today is FAR less polluted than it was in the 1960s. And there's every reason to believe the rest of the world will clean itself up as soon as it can afford to.

So why do we seem to constantly live in a doomed world? Perhaps someone has been lying to us: the top 101 media frauds.

BakBone Software has dropped to $1.22 on the ask. Unaudited Q1 results (period ending June 30, 2007). Bookings were $13.3 million, a 16% increase yoy. Cash is down to $9.6 million from $11.4 million due to the ongoing big audit problems plus R&D for the Sun agreement. Seems a bit cash anemic, but I could be wrong about that. But BakBone's financial statements have been a mess for over 2 years... not a good sign.

Aida Pharm (AIDA). Price is only down slightly. Q2 results: Gross margins are down to 44% from 53%. SG&A is up. They were just below breakeven on net income vs 5.5% net margins in prior year. Customer concentration is still high, but has switched to a totally different set of companies since last H1. Operating cash flow is good due to a drop in AR, an increase in customer deposits, offset by an increase in inventories and decrease in AP. Capex is a bit above depreciation. Lots of financing going on: net borrowing. Current ratio is still below 1. The stock price hasn't dropped enough at $1.05.

American Home Patient (AHOM). My concerns were massive debt combined with a lack of growth. Q2 results: The massive debt is still there. Revenues are shrinking. Stock price hasn't dropped nearly enough ($1.30 vs $2.32 back in early July). No thanks.

Amerex Group (AEXG). I noted they need a huge amount of growth just to break even, maybe if they succeed they'd be worth 15 cents. They were selling for 32 cents when I looked at them in June 2007. They're now selling for $1.85!!! Yikes. What happen? A director quit. They got new financing from some sort of hedge fund, but it's pretty brutal. Q2 results: current ratio is still WAY below 1. Very ugly balance sheet. Revenues nearly doubled and they've nearly reached operating breakeven. Still a long way to go for net positive income. A good part of that is amortization of debt discount. Operating cash flow is nearly breakeven thanks to that plus growing current liabilities. I didn't like them at 32 cents and I don't like them at $1.85 with twice the revenue.

AFP Imaging (AFPC). $1.80 seemed like a reasonable stock price. It's now down to $1.37. No new results. Not cheap enough.

Asia Electrical Power International (AEPW). These were the guys I considered to be totally wrong in their weighted average accounting. The company never responded to my second message to them. They approved 5 million employee/consultant stock options. Q2 results: 51,959,692 shares on June 30, 2007. 51,000,000 shares outstanding on Mar 31, 2007. Weighted average share count is listed as 51,319,898. The six month share cound shows as 51,159,949 whereas last quarter's 3 month average was listed as only 33,000,000. Looks like they ended up agreeing with me. I'm still not interested in the company.

Advanced Materials Group (ADMG). This was the disposable pan*ty company ("*" added to avoid zillions of silly unrelated web hits). I had figured it was worth around 70 cents based on a 13 million totally diluted share count. SEC issues, nothing I'd consider serious. Q2 results: revenues up only slightly from prior year. Gross margins are down. Operations burned cash. The stock price is 90 cents. Not interested.

Zhongpin (ZHNP). I liked the company, but the stock price wasn't cheap enough at $10.75. It's now $9.50. Q2 results: Cash doubled to $41 million, but current ratio remains just below 1. $64 million in revenue vs $56 million in Q1. Earned about 3 cents per diluted share. Operations generated huge cash due to an increase in AP (plus earnings). Huge investment in construction project and huge capex. Huge short-term loan and sale of stock (lots of stuff in the SEC filings). This might end up being a great investment, but I'm not convinced enough to shift money away from what I currently have.

American Bank Note Holographics (ABHH). Originally, I figured they were worth at least $2.75, then at least $1.50. Since then the stock has gone up from $3.35 to $4.90. Q2 results: revenues up 9.3% from Q1 (down yoy). Part of the revenue is from a discontinued program. ABHH has expanded into secure government documents programs: Colombian national ID card. Net income was 6 cents per share. It seems to me that big trends in the world will favor this industry. I figure the stock is worth at least $4.00, but I'd need some significant margin of safety to buy it.

Optionable (OPBL). This was an interesting stock. Their presumably largest customer dropped them. There were accusations and then lawsuits. I figured the stock was probably worth at least $2.00, but then there were board resignations and I backed off from considering this as an investment. The stock has dropped to 15 cents from around a dollar when I looked at it. Hmmm. Q2 results: $9 million net cash on $15 million total assets. Revenues way up from prior year, but way down from Q1 (not surprisingly). Negative gross profit. There's an "impairment-consideration receivable from stockbroker" which is about 10 times greater than the total assets of the company, resulting in a massive net loss. They explain this in Note 5.

However, at June 30, 2007, based upon the statements made by the Investor [NYMEX], the Company is unable to assert that it will receive any of the benefits initially contemplated by the Stock and Warrant Purchase Agreement. Accordingly, the Company has recorded a charge to its statement of operations amounting to approximately $145.8 million, for the six-month period ended June 30, 2007.

Operations cash flow was slightly negative for the quarter. With 52 million shares, the market cap is $7.8 million, which is less than the net cash. The market is valuing the business as being worth less than nothing. Right now they need to find some new way to make money. They lost a lot of their brokers. The top executives resigned. The principal line of business is hosed. It's very possible that the current stock price is close to the value of the business. No thanks.