GEO Investing

On May 23, 2010, we informed our premium users, via our message boards, that we were going short ORS.

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ORS Shares had been on fire earlier this week, reaching a high of $3.33 on May 24,2011. It seems that investors were excited about what appeared to be strong 2011 first quarter results released on March 23, 2011.

The headline 2011 vs. 2010 first quarter EPS figure was $12.73 vs. $(0.18).However, a closer look reveals that net income was aided by a one time non-cash gain.

First Quarter Results:

  • Sales in the quarter declined to $3.91 million, compared with $7.6 million a year earlier.
  • The Company achieved income from operations in the period of $342,000.
  • However, mainly due to a non-cash reversal of allowance for bad debtgenerating other income of $32,022,000 in the quarter, the Companyreported net income of $32.03 million or $12.73 per share, compared with a loss of $(446,000) or $(0.18) per share a year earlier.

By our calculations, after stripping out non-cash items from both years, the YOY EPS comparison tells a different story:

  • 2011 vs. 2010 First Quarter Adjusted EPS was nil vs. $0.33.

Let’s take a look at some other figures in the 2011 first quarter 10Q

  • Cash= $4,000
  • Account Receivables= $94.1 million or 6 times the current annualized revenue run rate
  • Operating Cash Flow= ($1,000)
  • Tax Payable= $33 million

Investors may have also been excited about:

The renewal of its account receivable insurance:

The reversal of the allowance for bad debt is a consequence of the fact that following a year-end write down of those doubtful accounts (accounts receivable) in 2010 which were not covered by an expired third party guarantee agreement, on March 30, 2011 the Company entered into a Credit Guarantee Contract with Beijing Xingwang Shidai Tech and Trading Co. Ltd. (“Xingwang”) and Zhong Hui Guarantee Corporation (“Zhonghui”), by which Zhonghui renewed its guarantee for any sales to Xingwang. Under this new agreement, coverage was increased from RMB 300 million (U.S. $44.2 million) to not more than RMB 500 million (U.S. $73.6 million) up to the period ending December 31, 2011.

The possibility that ORS’s growth tract will awaken if it were to receive a life line:

Mr. Guoji Liu, CEO of the Company, stated, “We are pressing ahead with our previously described plans for a strategic merger and/or a capital raise and/or a loan to resolve our cash flow problem. We believe we have made progress in this regard, but have not yet succeeded and cannot predict the final outcome of our various discussions. It is only with success in securing additional cash that we will be able to move forward with plans to strengthen operations. These plans include a focus on product sales in developing regions such as Africa and the introduction of new products that conform to consumer demand and the needs of China’s telecom operators.”

Quite honestly, this is news we would have gone long on when ChinaHybrids were in vogue not too long ago. We would have expected such news to lead to an increase in a company’s stock price as investors re-priced its risk premium. And that is what they did in the case of ORS. (Shares had more than doubled from a price of $1.09 after the release of the first quarter press release).

However, there are still significant risks to this story:

Status with the exchange at risk:

NEW YORK, NY–(Marketwire – Apr 27, 2011) – Orsus Xelent Technologies, Inc. (“Orsus” or the “Company”) reported today receipt of a letter from the NYSE Amex LLC (“the Exchange”), which stated the Company is not in compliance with Section 1003 (a) (i) of the Exchange’s Company Guide based on the Company’s reporting of less than $2 million in stockholders’ equity and losses from continuing operations and net losses in its two most recent fiscal years ended December 31, 2010; and Section 1003 (a) (iv) of the Exchange’s Company Guide with respect to its financial condition, which makes it questionable in the opinion of the Exchange as to whether the Company will be able to continue operations or timely meet its obligations. Additionally, the Company has been advised its common shares may not be suitable for auction market trading due to their low selling price.

The company was very clear in stating that more pressing matters are at hand, besides attaining accounts receivable insurance:

The Company noted the reversal in the quarter of the previously expensed bad debt did not generate cash. The Company’s most pressing concerns — and the continuing primary focus of management attention — are cash flow and related going concern issues.

ORS’s SEC filings reveal that the clock is ticking for the company to resolve its liquidity issues.

We anticipate that our cash reserves will be sufficient to fund our cash requirements only until the second quarter of 2011. We are evaluating various alternatives that may include, among other things, a strategic merger possibility and an offering and sale of equity, which, if successful, would improve our cash flow situation

To be clear, ORS has been very up front about the risks it currently faces, risks that investors may want to be aware of too.

Even if ORS does receive a life line in the way of financing, an acquisition or undertakes another RTO transaction, we need to consider at what cost it will be in this unfriendly ChinaHybrid market. Investors will be asked to trust an RTO

  • that appears to not have lived up to expectations in the past;
  • where it appears that SAIC filings do not match SEC filings;
  • which operates in an unpredictable industry that can lead to volatile quarterly financial results.

Nonetheless, the next thirty days will be key for ORS. We are currently short this name, but acknowledge that its small float could send shares sharply higher if the company is able to structure a life saving deal that investors will trust in an un-trustworthy ChinaHybrid environment.