Delayed 10-K Filings
posted by The Traveller on Thursday, March 24, 2011

Here is a little summary of Chinese companies that ran into problems with their full-year audit. The deadline for non-accelerated filers ends on March 31, so I do expect many more companies to file for an extension in the next seven days.

China Agritech (CAGC) was last trading at $6.25, down 49.07% for the year, and down 62.35% from the November 9 high at $16.60. The Trading China Tracker Score is UNDER REVIEW.

CAGC fired its auditor (Ernst & Young) earlier this month, and without an auditor it is impossible that we will see a 10-K filing before the end of the extended deadline. The stock is currently halted and there is a good chance that it won't reopen on Nasdaq.

"The Company could not complete the filing of its Annual Report on Form 10-K for the year ended December 31, 2010 due to a delay in obtaining and compiling information required to be included in the Company's Form 10-K, which delay could not be eliminated by the Company without unreasonable effort and expense. In addition, the Company has dismissed its auditors and is in the process of finding a new independent registered public accounting firm to audit the financial statements for the year ended December 31, 2010."

China Automotive Systems (CAAS) is currently trading at $7.69, down 43.54% for the year, and down 57.24% from the October 13 high at $17.98. The Trading China Tracker Score is 10 (Buy).

The company engaged PricewaterhouseCoopers in December as their previous auditor, Schwartz Levitsky Feldman, resigned. Now the Annual Report is delayed, as the company has to make a bunch of restatements. According to the filing, China Automotive expects to complete the report "as soon as practicable", but not within the standard 15-day extension period.

"The Company announced that it expects to restate its previously issued financial statements for fiscal year 2009 and the first three quarters of fiscal year 2010 to reflect non-cash gains or losses related to the accounting treatment for the Company's convertible notes issued on February 15, 2008 based on the guidance outlined in Accounting Standard Codification (ASC) 815. The Company undertook a review to determine the total amount of the errors and the accounting periods in which the errors occurred. The Company's review was overseen by the audit committee of the board of directors of the Company. The Audit Committee concluded on March 12, 2011 that the Company's previously issued audited consolidated financial statements as of and for the fiscal year ended December 31, 2009 and unaudited interim consolidated financial statements as of and for the quarterly periods ended March 31, June 30 and September 30, 2010 should no longer be relied upon because of these errors in the financial statements. The Company's board of directors agreed with the Audit Committee's conclusions. The Company intends to restate these financial statements. Because of the nature and timing of the review, the Company is unable to file its Annual Report on Form 10-K for the fiscal year ended December 31, 2010 with the SEC on March 16, 2011, the prescribed due date. The Company does not expect that such filing will be made within the extension period provided for under Rule 12b-25. The delay could not be eliminated without unreasonable effort or expense. The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2010 will be filed as soon as practicable after the Company has completed the restatement process.

China Biologic Products (CBPO) is currently trading at $15.50, down 5.44% for the year, and down 17.25% from the October 6 high at $18.73. The Trading China Tracker Score is 4 (Hold).

CBPO is one of those companies that upgraded auditors in December, from tainted (RINO, CHME) firm Frazer Frost to Big Four firm KPMG. The delay is not surprising, given that most former Frazer Frost clients came under heavy pressure, and KMPG hasn't done any audit work on CBPO before. The stock held up very well in the recent China small caps turmoil, but the short interest in CBPO is very high, many people seem to bet on KMPG not signing off on the report. I would definitely wait for the 10-K - which should be filed by the end of March - and check if it comes out clean (internal controls).

"The Registrant is unable to file its Form 10-K within the prescribed time period without unreasonable effort or expense due to the fact that it has not completed the process of preparing and integrating its operating and financial information into statements for the fiscal year ended December 31, 2010. The Registrant anticipates that it will file its Form 10-K no later than the fifteenth calendar day following the prescribed due date, as permitted by Exchange Act Rule 12b-25."

China MediaExpress (CCME) was last trading at $11.88, down 25.01% for the year, and down 50.44% from the January 28 high at $23.97. The Trading China Tracker Score is UNDER REVIEW.

The CCME story is well-known. The company's auditor resigned, and an internal investigation has commenced. The allegations are very serious and a best-case scenario would be a set of restatements that leaves the company with a meaningful cash position and a sizable business. It is unlikely that CCME will be able to engage a new auditor before the investigation has concluded, therefore a 10-K filing should probably not be expected before summer. We will see if Nasdaq allows a months-long trading halt, or if the stock will re-open for trading on the pink sheets.

"The Company cannot at this time estimate when the internal investigation of the relevant issues will conclude. The Company intends to file the Form 10-K as soon as reasonably practicable."

China Medicine (CHME) was last trading at $1.16, down 33.34% for the year, and down 56.23% from the November 10 high at $2.65. The Trading China Tracker Score is -1 (Sell).

CHME announced last night that "certain accounting and reporting errors were identified with respect to improper activities by certain employees." This will result in numerous restatements, and the upcoming form 10-K will be delayed for probably a very long time. I would avoid this name at all cost until we know more about what's going on there.

"As previously disclosed in the Current Report on Form 8-K filed by China Medicine Corporation with the Securities and Exchange Commission (SEC) on March 23, 2011, the Company announced that it expects to restate its previously issued financial statements for fiscal years 2008 and 2009, and the quarters within the fiscal years 2008, 2009 and 2010 in order to correct certain accounting and reporting errors that impact the accuracy of the previously issued financial statements (as defined below). The Board of Directors of the Company, after consultation with and upon recommendation of the management of the Company and its Audit Committee, concluded that the Company's previously issued financial statements contained in its Annual Report on Form 10-K for the fiscal years 2008 and 2009, and the Quarterly Reports on Form 10-Q for the periods within the fiscal years 2008, 2009 and 2010 should no longer be relied upon. The Company intends to restate the previously issued financial statements. Because of the nature and timing of the review, the Company will be unable to file its Annual Report on Form 10-K for the fiscal year ended December 31, 2010 with the SEC by March 31, 2011, the prescribed due date. The Company does not expect that such filing will be made within the extension period provided for under Rule 12b-25 of the Securities Exchange Act of 1934, as amended. The delay could not be eliminated without unreasonable effort or expense. The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2010 will be filed as soon as practicable after the Company has completed the restatement process."

Feihe International (ADY) is currently trading at $9.63, down 9.50% for the year, and down 30.72% from the November 8 high at $13.90. The Trading China Tracker Score is -2 (Sell).

Feihe has already announced full-year numbers in a press release, but the 10-K filing is still missing. The company expects to file its annual report by the end of the 15-day extension, or by March 31, 2011.

"The registrant is unable to file its Annual Report on Form 10-K for the year ended December 31, 2010, within the prescribed time period because the information required for an accurate and full completion of the report, including but not limited to the financial statements that form a part thereof, could not be provided within the prescribed time period without unreasonable effort or expense. The registrant expects to file its Annual Report on Form 10-K as soon as practicable, and in no event later than the fifteenth calendar day following the prescribed due date."

Fuqi International (FUQI) is currently trading at $3.29, down 48.44% for the year, and down 61.16% from the October 11 high at $8.47. The Trading China Tracker Score is UNDER REVIEW.

The last quarterly or annual report that we have seen from FUQI was filed on November 9, 2009. Nasdaq has granted the company several extensions, the last of which expires on March 28, 2011. By that date the Company must file with the SEC all delayed reports and any required restatements. It seems very unlikely that FUQI can comply with this request, which means that the stock might face a delisting from Nasdaq as early as next week.

"The Registrant has also been unable to complete and file its Annual Report on Form 10-K for the year ended December 31, 2009 due to the time and effort required by the Registrant to conduct a review and analysis of the accounting errors, the impact of the accounting errors on its condensed consolidated financial statements, and preparation of the amended Quarterly Reports on Form 10-Q/A to present the Restatements, in addition to the time and effort required to complete the audit for the year ended December 31, 2009. In addition, due to the foregoing, the Registrant has been unable to prepare and file its Quarterly Report on Form 10-Q for the three months ended March 31, 2010, its Quarterly Report on Form 10-Q for the three and six months ended June 30, 2010, and its Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2010, by their respective due dates. Due to additional time and efforts expended in an attempt to complete the Restatements and prepare and file the annual report for the year ended December 31, 2009 and quarterly reports for March 31, 2010, June 30, 2010, and September 30, 2010, the Registrant is unable to file its Annual Report on Form 10-K for the year ended December 31, 2010. The Registrant will file its Annual Report on Form 10-K for the year ended December 31, 2010 as soon as it is able; however, the Registrant is not able to provide a reasonable estimate as to such filing at this time, which will not occur within the fifteenth calendar day after the prescribed due date for such report."

Fushi Copperweld (FSIN) is currently trading at $8.73, down 1.69% for the year, and down 22.47% from the November 3 high at $8.47. The Trading China Tracker Score is 13 (Strong Buy).

Similar to CBPO, Fushi Copperweld is also a former Frazer Frost client which changed auditors to KPMG (January 24), and now has to file for a delayed Annual Report. Short interest is high and as the stock is still trading at January levels, it has room to the downside if the 10-K doesn't come out clean or if the delay is longer than currently expected. The company announced preliminary results on March 11, but it is prudent to wait for the audited numbers with the Annual Report.

"In the process of preparing our financial statements for the year ended December 31, 2010, management reevaluated the application of GAAP in certain past accounting treatments, which are non-cash and non-operating items. While it is unfortunate that these reconsiderations are causing a delay in our filing, we stress the fact that these are all non-cash adjustments related to various corporate-level account treatments and will not materially affect our non-GAAP, core operating results such as revenue, gross profit and operating income. The Company plans to file its Form 10-K for the year ended December 31, 2010 and publish financial fourth quarter and full year results as soon as practicable following the completion of this reevaluation. However, due to the time needed, we are not in a position to file our 10-K within the required time period."

Home System Group (HSYT) is currently trading at $0.14, down 94.40% for the year, and down 96.00% from the October 18 high at $3.50. The Trading China Tracker Score is 9 (Buy).

HSYT filed for a 10-K extension a whole two weeks before the due date, which is unusual at best. The company gave only the standard explanation without going into detail: "Certain financial and other information necessary for an accurate and full completion of the Form 10-K could not be provided within the prescribed time period without unreasonable effort or expense." With all these uncertainties, HSYT is for gamblers only at this point.

HQ Sustainable Maritime (HQS) is currently trading at $3.20, down 32.92% for the year, and down 36.89% from the January 7 high at $5.07. The Trading China Tracker Score is 6 (Hold).

"HQ Sustainable Maritime Industries is unable to file its Report on Form 10-K for the year ended December 31, 2010 within the prescribed time period due to delays in compiling the information for the preparation of the financial statements. The Registrant fully expects to be able to file within the additional time allowed by this form."

Kingold Jewelry (KGJI) is currently trading at $2.55, down 37.50% for the year, and down 75.00% from the October 6 high at $10.00. The Trading China Tracker Score is 9 (Buy).

"During the process of evaluating its internal control over financial reporting and completing the preparation of its consolidated financial statements, the Company plans to amend and restate its third quarter 2010 financials to reflect solely a non-cash stock compensation expense resulting from the issuance of 100,000 shares of restricted common stock in December 2010 pursuant to the terms of a pre-existing consulting contract. In connection with this adjustment, the Company has engaged a third party valuation firm to assist the Company and its auditors in properly valuing the compensation expense. It is expected that the final results of the valuation report will be available no later than March 25, 2011. The impact of this non-cash adjustment on the Company's net income is expected to be not more than $0.02 per share for the three and nine months ended September 30, 2010. As a result, the Company is unable to finalize its financial statements for the year ended December 31, 2010 until such results have been obtained. In connection with the Company's evaluation of its internal control over financial reporting, the Company has identified some control issues that it is analyzing to determine if they rise to the level of material weaknesses that would require disclosure in its Form 10-K for the year ended December 31, 2010."

ShengdaTech (SDTH) was last trading at $3.55, down 27.54% for the year, and down 44.95% from the November 8 high at $6.45. The Trading China Tracker Score is UNDER REVIEW.

SDTH announced an investigation into "potentially serious" issues with its financials on March 15, and trading has been halted by Nasdaq shortly after. It could take months for SDTH to complete this investigation, and the wording of the announcement suggests that restatements are necessary.

"On March 15, 2011, Shengdatech announced that it had appointed a special committee of the Board of Directors to investigate potentially serious discrepancies and unexplained issues relating to the Company and its subsidiaries' financial records identified by the Company's auditors in the course of their audit of the consolidated financial statements for the fiscal year ended December 31, 2010. The special committee is composed of the independent directors comprising the Company's audit committee. The audit committee retained O'Melveny & Myers LLP as independent outside counsel, which has initiated an internal investigation. The outside counsel to the committee has notified the Staff of the Securities and Exchange Commission of the commencement of the internal investigation. Given that the investigation only recently commenced, the Company cannot predict at this time whether that investigation will require any adjustments to its financial statements, and if so whether such adjustments will be material. Due to the pendency of the internal investigation, the Company will not be able to file its Annual Report on Form 10-K in a timely manner. The Company cannot at this time estimate when the internal investigation of the relevant issues will conclude. The Company intends to file the Form 10-K as soon as reasonably practicable."

Wonder Auto Technology (WATG) is currently trading at $5.79, down 23.21% for the year, and down 49.66% from the November 9 high at $11.50. The Trading China Tracker Score is UNDER REVIEW.

And another company that upgraded auditors to Big Four (PricewaterhouseCoopers) recently, and now faces a possibly long delay with their 10-K filing. Restatements for its financial statements all the way back to 2008 are to be expected, and WATG already said that they most likely won't make the extended deadline at the end of this month.

"As previously announced on February 23, 2011, in connection with the preparation of its consolidated financial statements for the fiscal year ended December 31, 2010, Wonder Auto Technology concluded, that its financial statements as of and for the years ended December 31, 2008 and 2009, included in its Annual Report on Form 10-K for the year ended December 31, 2009, as well as the financial statements included in its Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30 and September 30 during each of the years 2008 and 2009 should no longer be relied upon due to a cutoff error regarding timing of revenue in such periods. Additionally, the Company is still evaluating the impact of the cutoff-errors on its financial results for the year ended December 31, 2010 and on its internal control over financial reporting as of December 31, 2010. As a result, the Company is unable to complete its Form 10-K within the prescribed time period. The Company remains committed to completing its Form 10-K at the earliest possible time, but does not currently anticipate its completion within the fifteen calendars following the prescribed due date."

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4 Comments:

At March 25, 2011 6:26 am , Blogger Chickenpookie said...

I thought this article was interesting, it kinda opened my eyes a little.

http://www.chinaaccountingblog.com/weblog/the-emperors-new-suit-vies-.html

 
At March 25, 2011 6:37 pm , Anonymous Anonymous said...

How many US listed Chinese firms will comply with SEC regulations (yes, there will be new regs, eventually) reference mismatched financials?

I am guessing that less than 30% of US listed Chinese firms will comply, with the rest de-listed/going dark.

 
At March 25, 2011 10:14 pm , Blogger The Traveller said...

Chickenpookie, thanks for the link. I am following Paul Gillis's blog regularly and strongly recommend it to everyone interested in U.S.-listed China stocks.

About regulations, we should see within 3-6 months which companies are serious about their public status. Those will survive and possibly see multiple expansion. The current earnings season is very revealing, there are new fatalities almost every day. As I speculated in the article, FUQI just announced their delisting notice. Two other stocks that are currently halted (NIV, CIL) won't start trading again anytime soon as their auditor found accounting fraud. Again, it is strongly recommended to wait for the annual reports before jumping in at any price. Unless you are a trader and are prepared for any outcome.

 
At March 26, 2011 5:55 am , Blogger Chickenpookie said...

Trav, Paul basically says that Chinese VIE structures are doomed to failure because there is no potential for legal recourse, and I can understand his point quite well.

In fact, I'm beginning to seriously wonder about all of the Chinese stocks b/c of lack of legal recourse, what mechanisms are in place to deter fraud?

I could really use some help with this subject.

 

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