Reading the Tea Leaves of Asia Cork’s Recent Form S-1 Filing

by Dan France, GeoTeam Contributor

On February 12, 2010, Asia Cork Inc (OTC BB:AKRK) filed a preliminary Form S-1 outlining a planned public offering of units consisting of one common share and one warrant.  The offering is likely to be completed in May 2010.

Since we don’t know the offering price for the units or the exercise price for the warrants, the dilution existing shareholders face is unknown. We do know, however, that even if the offering is placed at the current market price of around $0.40 per share with an exercise price for the warrants also at $0.40 that AKRK would still have a net book value of around $0.46 once the dust from the offering settles. That means AKRK, at its recent price of $0.38, is trading at a 17% discount to its projected net book value after the offering and before considering continued profitability during 2010.  As a frame of reference, AKRK’s net book value at December 31, 2009 is estimated to have been around $0.58 per share.(see table below)

Please note that the Company will do a reverse split on the effective date of the offering to facilitate an up-listing to either the AMEX or NASDAQ. We don’t know the reverse split ratio, but we feel 1 for 10 is a solid assumption. That implies a share price of around $4.00 based on the current market price, qualifying the Company for listing on the AMEX.If  the company's market price increases between now and the effective date, the dilution experienced by existing shareholders will be mitigated and the reverse split ratio may be reduced.

It is possible that Asia Cork is a coiled spring ready to be unleashed once management has the liquidity needed to embark on their well defined and long planned course for rapid expansion and growth, outlined in their financial filing and current S-1 filing. The benefits of the offering could therefore be far greater for existing shareholders than the consequences of dilution and the reverse split:

• Cash proceeds from the offering of approximately $16 million will ultimately be realized by the Company.
• Management intends to use the proceeds to, among other things, increase sales and marketing efforts both domestically and internationally, enhance production capacity (currently operating at 95% maximum capacity and unable to meet growing demand for their products), ensure raw material supplies, acquire other cork manufacturing factories and exporting companies in China (key transactions already negotiated and pending closure), and establish their own cork plantation in China.
• Once management’s initiatives are implemented, Asia Cork will be a vertically integrated business realizing significant operational efficiencies, cost savings, a secure source of raw materials supply, and expanded margins (200,000 square meters of new production capacity will be dedicated to their highest margin floating cork floor products).
• The notes payable due to investors, including Ancora Greater China Fund, will be converted to equity, resolving a liquidity issue that has been plaguing the company.
    
• The up-listing to AMEX or NASDAQ will open AKRK to many more investors and improve the liquidity and stature of its shares.

Assuming 2009 fourth quarter EPS results show progress and dilution is not overdone, we continue to believe patience with AKRK is warranted and longer term value investors may be rewarded. At the very least, the company's shares should see an adjustment in  price due to the rectification of  liquidity problems.

Asia Cork Estimated Book Value