CNAM: I don't believe either in a scam in this case. Rather, the 10Q indicates to me an astounding incompetence of Mgmt in dealing with financial and legal matters. They admitted it themselves in the 10Q re. inefficiencies in "internal disclosure controls" that led to several major gaffes. One of these was the illegal removal of the restrictive legend of CEO Yao's personal 1.3M restricted shares that Yao illegally authorized in conjunction with his private $5M loan from Crisnic.
Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective at September 30, 2010 to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
But more seriously: how could they dare issue a revised guidance on Sep 10 (just 3 weeks before the end of Q3) of 140MM rev for the year with only 25.6M booked to first half? This guidance effectively means they were guiding for min. 114MM for the second half (or 50 to 60 MM average for Q3 and Q4 each). They even went on saying Q3 had only 2 weeks of power cuts that should only affect Q4 revenue, implying a bigger Q3 than Q4. Quote from the Sep 10 revised guidance:
The energy restrictions will significantly reduce our recycling capabilities in the fourth quarter which is expected to impact its revenue in 2010 by as much as $40 million. This has caused management to revise its financial guidance for the full year of 2010 which is now expected to exceed $140 million with net income exceeding $8 million.
Didnt they know by Sep 10 that Q3 rev was going to be way below Q3'09 rev of only 27.3MM due to reduced ore prices and demand? What's worse, they pinned big hopes on Q3 recycling revenues (also during the Q2 CC) which turned out to be merely $9.5MM, even less than what they did in Q2 with all its startup problems. That's a miscalculation of at least 30MM that ironically happened almost at the end of a quarter, not at the beginning. Seriously, assuming they knew how poor the trading business really was in Q3, how could they possibly guide for a recycling revenue in Q3 in the order of 35MM to 50MM ? This to me seems like either utter incompetence and internal miscommunication or a blatant lie.
From todays' 10Q:
Net revenues for the third quarter of 2010 decreased by approximately 32% over the same period in 2009, primarily as a result of a decrease in sales of iron ore ($18.6 million), processed recycled metal pellets ($4.3 million) and coke ($2.3 million), partially offset by $9.7 million in sales of processed scrap metal generated by our new scrap metal recycling facility, sales of manganese totaling $5.7 million and $1.1 million of chromium sales.
