WestPark Capital's RTO Deals

WestPark Capital's CEO, Richard Rappaport invented a mechanism he called WRASP, in which a company becomes publicly traded through a reverse merger and trades directly on a senior exchange (NYSE, Amex, or Nasdaq), avoiding the OTCBB completely. Rappaport praises his invention, stating that it has "generally proven to be less costly, less time consuming, involves less risk and even less dilution of ownership than a traditional IPO or a reverse merger. ... The 'WRASP' generally possesses superior liquidity, valuation and institutional coverage, combining the benefits of an IPO and Reverse Merger."

In the past two years, WestPark completed five such WRASP deals. A sixth, China Wesen Recycling Technology, is currently in the IPO pipeline.

• March 2009 - NIVS IntelliMedia Technology (NIV, NYSE Amex)
• October 2009 - ZST Digital Networks (ZSTN, Nasdaq)
• January 2010 - China Electric Motor (CELM, Nasdaq)
• June 2010 - China Intelligent Lighting & Electronics (CIL, NYSE Amex)
• February 2011 - China Century Dragon Media (CDM, NYSE Amex)

Now the New York Stock Exchange has halted trading in three of those five stocks last week. CDM was halted on March 21, at market open, and both NIV and CIL were halted on March 24 at 9:51am. NYSE Regulation issued a press release about the CDM halt, stating that it "is evaluating both the need for certain public disclosure, as well as the overall suitability for continued listing of the Company’s common stock." The company was requested to provide additional information to NYSE Amex on or before March 24, 2011, and while the company announced that it intends to fully cooperate with the regulators, the trading halt is still in place this weekend.

NYSE issued a similar press release for the NIV trading halt. But here we have since learned a lot more details about what happened. In an 8-K Filing late Friday, it was revealed that Malone Bailey submitted its resignation as the Company's independent auditor. The firm based its resignation on what it characterized illegal acts involving the Company's accounting records and bank statements and discrepancies in accounts receivable. And if we look at MaloneBailey's resignation letter in detail, we can see that this is likely another case of accounting fraud:

In our resignation letter dated March 24, 2011, MaloneBailey cited that MaloneBailey found accounting fraud and irregularities in forging accounting records and bank statements during 2010 NIVS audit. On March 21 with email and On March 22, 2011, MaloneBailey, LLP, informed Charles Mo, NIVS independent board member and the chairman of the audit committee about "significant difficulties encountered during the 2010 audit." During the conversation, MaloneBailey, LLP informed Mr. Mo that two other public companies audits were conducted at the NIVS accounting department location. These two companies are located in Beijing and Guangzhou. However, their books and records were shipped to NIVS accounting department and MaloneBailey conducted the audits of these two public companies at NIVS accounting department. NIVS accounting personnel were involved in coordinating the two audits. MaloneBailey found accounting fraud and irregularities in these two audits. After the discovery, we encountered difficulties with management trying to limit our scope of the NIVS audit.

NIV and China Intelligent Lighting (CIL) have a lot in common. They share the same facilities, same auditor, and there are many connections within senior management (founders, directors). It is reasonable to assume at this point that the trading halt for CIL was imposed for related issues.

Which brings us back to WestPark Capital and Richard Rappaport. It might just be coincidence that 60% of the firm's "WRASP"-IPOs were halted within three days, but I wouldn't bet the farm on this. In fact, I would be very careful with the two remaining stocks, CELM and ZSTN, until we learn more details. The latest of WestPark's deals just became a public company last month, and should CDM's situation be similar to that of NIV, it will fall back directly to WestPark and the quality of its pre-IPO due diligence process. The firm has been in trouble already last year, when FINRA fined WestPark to pay $400,000 for failing to supervise brokers with histories of disciplinary actions (a matter of general securities fraud), and suspended its former Chief Compliance Officer and Chief Operations Officer for several months.

Here is a list of all reverse merger deals of the past few years, involving shells owned by WestPark Capital / Richard Rappaport:

• Asia Time (ATYM.PK, SRKP 9 Inc.), delisted from NYSE Amex on April 23, 2009
• China Century Dragon Media (CDM, SRKP 25 Inc.)
• China Electric Motor (CELM, SRKP 21 Inc.)
• China Intelligent Lighting & Electronics (CIL, SRKP 22 Inc.)
• China Shenghuo Pharmaceutical (KUN, SRKP 8 Inc.)
• China Wesen Recycling Technology (SRKP 23 Inc.), pre-IPO
• Feigeda Electronic Technology (SRKP 20 Inc.), not yet listed
• Highpower International (HPJ, SRKP 11 Inc.)
• NIVS IntelliMedia Technology (NIV, SRKP 19 Inc.)
• Yinlips Technology (SRKP 17 Inc.), unlisted, applied for NYSE Amex listing on June 16, 2009
• ZST Digital Networks (ZSTN, SRKP 18 Inc.)

Earnings Previews, Part 3

GC China Turbine (GCHT.OB) has yet to post a profit or any meaningful revenue but there's a chance that at least the latter will be accomplished with Fourth Quarter earnings. The company posted a slew of positive press releases in the past weeks and said it is well on track with their ambitious plan of generating orders for their wind turbines with an estimated value of $1.1 billion from 2010-2015. However, the stock is down 20% for the year and almost 50% from its November high at $3.79. Highly speculative but possibly very rewarding with the next momentum driven rally.

China GrenTech (GRRF) will report Wednesday, March 31, after the close. The stock just turned positive for the year on Friday after the company announced to be the exclusive WLAN provider for the 2010 Shanghai World Expo. GRRF is expected to post a small profit for the Fourth Quarter, if all goes well in the same range as for Q3 ($3 million net income). Year-over-year comparables will look good as GrenTech was not profitable a year ago, but keep in mind that GRRF handily beat estimates in all of the past four quarters.

Huifeng Bio-Pharmaceutical (HFGB.OB) is very thinly traded and completely under the radar. The company is profitable, pre-announced a healthy net income of $2.8-$3.0 million for FY09 (80% to 93% year-over-year growth) and provided net income guidance between $4.5 million to $5.0 million for 2010. HFGB is in the pharmaceutical raw materials business and doesn't carry drug approval and acceptance risks that are common in the pharmaceutical industry. This should allow them to have a pretty good idea of how their business is progressing mid- to long-term.

Hong Kong Highpower (HPJ) is set to report earnings on March 30 before the open. Like most other Chinese battery stocks HPJ is down sharply for the year (-20%) and from its January high (-37%). Still valuation is one of the highest in the group and the company has to post very strong numbers to support the current short-term uptrend. The stock climbed 25% in the past five sessions probably in anticipation of the earnings report. Personally I would avoid the stock, but I have been wrong about HPJ in the past when it caught strong momentum and tripled in price from November until January.

Jade Art Group (JADA.OB) is sitting on one of the largest jade reserves in China but we do not know much about how the business is progressing. What we know is that the company had six sales contracts for raw jade in 2008, valued at $42 million and "did not acquire any new customers or enter into any new contracts with existing customers during the first nine months of 2009." There should be about $11 million revenue left to collect from those contracts or about as much as JADA reported for Q3/2009. The key here is to look out for new sales contracts and possibly new customer wins in the near future.

Lihua International (LIWA) is scheduled to report on March 31 before the start of trading. The company already pre-announced full-year 2009 revenue of $161.5 million and net income of $25.5 million (non-GAAP) representing 118% income growth over 2008. LIWA anticipates 2010 year-over-year growth of approximately 30-35% in gross profit and 35-40% in non-GAAP net income. The good performance of close peer Fushi Copperweld (FSIN) supports Lihua's high growth prospects. However, there are persistent rumours about possible accounting fraud at LIWA and the stock behaved very vulnerable to recent FUQI issues.

Lotus Pharmaceuticals (LTUS.OB) is another one of China's undervalued health care micro caps. The stock is up 12% for the year but at the current price of $1.43 it has given back most gains since the January high at 2 dollars. The Fourth Quarter 2008 has been Lotus' strongest so far and I do expect nothing less from next week's earnings report than a new record in quarterly net income, possibly more than $7 million. If Lotus delivers I call it an instant buy at current levels and it should be able to take out this year's highs pretty quickly.

China North East Petroleum (NEP) is now slightly down for the year after they had to restate several quarters and admitted to having made 'computational errors' and 'incorrect assumptions.' Plain numbers say the stock is undervalued here and should appreciate significantly this year. The company also announced record oil production for 2009 and drilling results exceeding their expectations. Watch out for the company confirming their 2010 guidance in the conference call and words about the possible impact of a revamped Chinese resource tax on FY2010 results.

New Energy Systems (NEWN.OB) is one of my favourite core holdings in the China Small Caps space as the company has improved in all areas: clever acquisitions, vastly improved investor relations and communications, actively pursuing Nasdaq listing in 2010. NEWN recently reaffirmed 2010 EPS guidance of $1.23, which makes the stock the cheapest one in the battery space. Fourth quarter results will be interesting as NEWN repeatedly held on to their low guidance and expectations are therefore pretty low. With a Nasdaq listing the stock should double from here ($7) and consolidated results including acquisitions will display favourably to 2009 numbers in the quarters to come.

NF Energy Saving (NFEC.OB) will file their 10-K next week. Preliminary 2009 results were announced late February with record revenues and EPS of $0.35. The company also said that an additional $3 million in revenue had to be moved to the First Quarter so those numbers should be not too bad either. I would watch out for proper 2010 guidance beyond the current fluffy note that the 'outlook appears favorable.' and some more details about an uplisting to a senior exchange. The market likes NFEC's industry as the performance of recently uplisted peer China Recycling (CREG) shows.

Orient Paper (ONP) reports Q4 and FY09 numbers on Tuesday, March 30, before the open. There shouldn't be many surprises as ONP has already pre-announced 2009 numbers with revenues up 57% to $102.1 million and EPS up 27% to $1.03. The stock is down 8% for the year and down sharply from its January high of $15.15. Orient Paper is targeting at least 45% net income growth for 2010 and as I pointed out in a previous article an expected revaluation of the Chinese currency should add significantly to ONP's bottom line.

Orsus Xelent Technologies (ORS) is a beaten down consumer electronics stock, trading 75% below book value. However, the company is still profitable, earned $0.20 per share for the first nine months of 2009, which compares favourably to the current share price of $0.48. There are many reasons for the depressed stock price: the company has almost no cash on its books, reported weak earnings, reduced margins, and a 53% drop in net income for the Third Quarter 2009, and pre-announced lower than anticipated full year sales in late December. The 2010 outlook in this last press release was cautiously optimistic, though. For the earnings report this week I would look only at liquidity problems, cash flow, and signs for a business turnaround in the second half of 2010. The company has multi-bagger potential if it can turnaround sales but currently it seems more likely that the stock is kicked out of NYSE Amex before any of this materializes.