Time To Short Orsus Xelent?

| About: Orsus Xelent (ORSX)

Orsus Xelent (ORS) enjoyed a remarkable jump in the share price, nearly four-fold in a matter of just five trading days. What does the company do? Well, it designs and distributes 'award winning' mobile phones for the Asian market.

Now, what's going on? Why the near 400% price gains in a matter of days? Well, that's difficult to say, as there were no real news items apart from the fact that a micro-cap promotor was at work here.

Earnings in August were simply terrible:

Sales in the quarter declined from $6.47 million a year earlier to $4.64 million, and for the first half in 2011 were $8.56 million compared with $14.06 million in the first six months of 2010. A net loss incurred in the 2011 quarter widened to $2.88 million from $248,000 in the same period a year ago. Through the first six months of 2011, the Company reported net income of $29.15 million or $11.78 per share, on 2.52 million shares outstanding, compared with a net loss in the first half of 2010 of $702,000. The year over year increase in the six month period was due to a reversal of an allowance for bad debt resulting from a renewal of a third party guarantee on accounts receivable. [Marketwire]

With respect to that 'third party guarantee':

With respect to guarantees on the Company's very substantial accounts receivable, (the latter reached $100.36 million at June 30, 2011), on August 19, 2011 the guarantee contract signed on March 30, 2011 was again renewed. The guarantee amount for receivables from Xingwang, the Company's primary distributor, also was increased from RMB 500 million to not more than RMB 650 million. [Marketwire]

Well, we have losses and extremely large accounts receivable (even if most seem to fall under the guarantee). But it all seems pretty serious, something not lost on the CEO either:

Mr. Guoji Liu, CEO of the Company, stated, "As our accounts receivable have continued to grow, our major problem is our weak cash flow which has resulted in a serious going concern issue. Our working capital is not sufficient to support the operation of the Company and raises doubt about our ability to continue as a going concern."

He added, "Recoverability of a major portion of our assets amounts is dependent upon the continued operation of the Company which, in turn, is dependent on the Company's ability to raise additional capital and secure financing. As such, we continue to explore, among other things, a strategic merger possibility and an offering and sale of equity. In the latter regard, on August 12th we filed a shelf registration statement with the Securities and Exchange Commission, which, if approved, would give us flexibility with respect to the possible sale of a variety of corporate equity and debt securities with an aggregate price of $6 million." [Marketwire]

Numerous curious things. For starters, these terrible earnings caused not even a blip in the share price when they were announced (August 22), see graph below.

Indeed, looking at some figures:

  • $0 cash(!) and $43.5M in debt

  • Negative operating cash-flow even (225K year to date)

  • With the explosion in the stock price we have an RSI of 86

Now, what on earth has caused this explosion in the stock price? There are basically three candidates:

  • Someone is buying the whole thing or going to pump serious money in it
  • The company (or the guarantor) has found a way to recover a significant part of those 'accounts receivable' (we're almost inclined to think that they made somebody an offer they couldn't refuse)
  • The stock-promo guys are doing a good job

The first seems quite unlikely, in fact, a significant dilution seems way more likely, considering the state of the company's finances and lack of cash.

The second, well, that would mean a one-off shot in the arm, possibly of a whopping $100M, which could indeed be reason for celebration. However, much of this falls under the (renewed) guarantee anyway (which was the reason for the stock price explosion in May).

There was an equally mysterious stock explosion in June that even caught the attention of Reuters:

The stock advanced more than 70% before paring gains to close at $5.50, up 44%. Volume was more than 4.17 million shares, about 14 times the 50-day average volume. Since a recent low of $1.45 reached on June 6, the stock has surged more than 320%. The catalyst for the rise in Orsus was not clear, and the company could not be contacted for comment; the phone number for Orsus' New York office was not in working order and no one answered at Focus Asia Partners, its investor relations firm.

What further undermines confidence is that the company once traded at $90 (2007), came to the markets via reverse merger, and several brokerages prohibit buying it on margin (Interactive brokers, Scottrade).

All in all, business is bad, fundamentals are bad, there is probably some stock sale or loan coming, there are a number of warning flags like sudden stock explosions for no apparent reasons. We are just witnessing another one and we think this is most likely due to the micro cap promo guys. The rally is very extended as it is, with near 400% gains in a week.

So if this article arrives on time for Friday morning trading, we think a short above $3.50 (the stock closed at $3.76 on Thursday, at the time of writing) is a pretty good idea.

We part with a question we've asked before in relation to these type of companies. Why bother with a listing in the U.S.?

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in ORS over the next 72 hours.

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