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PDFTo be sure, CHTL could use some assistance. More than a year ago, CHTL agreed to pay $195 million for a 49% stake in Chinacomm – an Asian broadband wireless company that ranks as its primary asset – but it still lacks the money required to actually pay for that deal. Although CHTL has inked plenty of financing agreements in the meantime, most recently with two mysterious firms known as Excel Era and the Isaac Organization, the company never seems to collect promised cash from those backers in the end.
For its part, CHTL has blamed outside forces for those failures.“All of the equity deals have been negotiated during the biggest capital contraction since the Great Depression,” CHTL stated in response to questions from The Street Sweeper on Thursday. “Beyond that, the company cannot speculate on the specific reasons Excel or any other investor did not come through after signing a contract.”
So far, those financing deals have served as little more than catalysts for temporary rallies in CHTL shares that inevitably end when the money fails to appear. CHTL’s latest arrangement, a private placement that suggested a market value of $1.33 billion for the bleeding company, stands out as perhaps the best example of all.
On Feb. 9, CHTL announced that it had secured a deal to sell a 48% stake in the company to Excel and Isaac for $640 million or the equivalent of $3 a share. The stock, available on the open market for one-third of that price just a few days earlier, rocketed 50% to an intraday high of $1.80 – with a staggering 11.7 million shares changing hands – on the news. The shares, worth less than 40 cents a year ago, continued to trade above $1 over the course of the next few weeks.
By then, however, CHTL skeptics had already begun to raise serious questions about the celebrated financing deal. They focused on Excel, a Hong Kong firm that had pledged to deliver three-quarters of the $640 million in funds, in particular.
Although Excel claimed to manage more than $200 billion in assets – a sum that would make it one of the largest investment funds in the world – the firm seemed to burst onto the scene out of nowhere. Before announcing its big investment in CHTL, in fact, Excel failed to register on the public radar at all.
Even so, as a huge fan of CHTL, Smith saw no reason for alarm.
“Understand that many, many investment firms in Asia are NOT publicly held and do NOT ‘advertise’ their business success,” Smith wrote when reiterating his strong buy recommendation and $8 price target on CHTL in late February.
“Nothing obviously will do more to build their credibility and CHTL’s credibility than making their (promised) payment,” he added. But “I now have ZERO doubt as to their ability and intent to not only make their payment deadlines but advance the deadlines” and deliver the funds early.
CHTL was supposed to receive its first big payment, totaling $240 million, by March 1. Four days after that deadline passed, however, CHTL suddenly announced that Excel had decided to scale back its investment and allow Isaac to make up the difference. Excel has since dropped out of the financing deal altogether, and even Isaac – which hasalready collected huge chunks of CHTL stock – has decided to renegotiate the terms of its own contract “in light of recent developments” and withhold any further payments to the company in the meantime.
Nevertheless, Smith has expressed total confidence that Isaac will deliver the promised funds. In an interview with The Street Sweeper on Thursday, Smith said that CHTL had already negotiated a new $300 million financing arrangement with Isaac and would announce details of that contract by “Monday or Tuesday at the latest.” Smith has offered broader reassurances to his followers on Twitter, with CLRH’s stock bouncing from 55 cents to 74 cents over the past week in response.
With Excel now out of the picture, however, critics have decided to take a closer look at CHTL’s remaining finance partner.
Until now, skeptics note, Isaac has focused primarily on real estate projects – carrying much smaller price tags – and the firm needed bank loans itself for some of those. (In a curious move, Isaac did branch out last fall by investing in a B-list movie starring a former “Playmate of the Year.”) If Isaac truly has $300 million to spare, critics ask, why has the firm – which has apparently been involved with CHTL from the start – waited until now to suddenly pledge the funds? Furthermore, they wonder, why would such a cash-rich firm list a U.S. address that corresponds with a UPS store(suggesting that it operates out of a post office box) instead of a legitimate headquarters?
Regardless of the answers, CHTL clearly needs some funds. According to its latest quarterly report, which will soon berestated because of regulatory concerns, CHTL has $280 million in current liabilities and almost no money available to cover those looming debts. Since it went public two years ago, CHTL has instead issued loads of company stock – while waiting for big cash infusions that never seem to materialize -- in order to cover its mounting bills.
Meanwhile, CHTL itself has readily admitted that the company must resolve its liquidity problems and ultimately achieve profitability if it hopes to continue operating as a going concern.
CHTL insiders, paid with millions of shares of company stock, have already begun to cash out some of their holdings while they wait for better times. If CHTL follows the same devastating path blazed by some of Smith’s previous microcap picks, however, the company’s best days may already be behind it.
Outfoxed
Despite his popularity, as evidenced by two bestselling business books and a highly rated show on Fox, Smith has a checkered track record at best.
Smith actually began stumbling about a decade ago. He helped launch a high-tech mutual fund at the height of the dot-com bubble in 2000, Reuters revealed, only to see it shut it down as a result of massive losses – with his second-largest holding plummeting by 90% -- less than one year later. He has gone on to embrace some other notorious money-losers since that time.
For example, Smith has often recommended some of the same ill-fated stocks exposed by Citron Research (formerly known as StockLemon) before they crashed. He has also criticized the bearish website, despite its early calls on several doomed companies, along the way.
When Immtech (OTC: IMMP.PK) fell 30% on a devastating StockLemon report seven years ago, in fact, the company relied on comments from Smith (who wasn’t even following the stock) for help. Less than a month earlier, Immtech pointed out, Smith had dismissed StockLemon as “nothing more than a mouthpiece for short-selling hedge funds or syndicates of individuals who have an incentive to drive the price (of targeted stocks) down.”
Immtech’s stock, which fetched $25 before StockLemon’s report, now trades on the lowly Pink Sheets for 10 cents a share. Meanwhile, Smith has gone on to promote several stocks exposed by StockLemon/Citron Research – including InterPharm (OTC: IPAH.PK), Emcore (Nasdaq: EMKR) and Zeros & Ones (OTC: ZROS.OB) – that have fared quite poorly as well.
Smith has favored risky companies targeted by other stock detectives, too. In 2006, for example, Smith took aim atsharesleuth.com – a new website launched by billionaire short seller and Dallas Mavericks owner Mark Cuban – when it examined Xethanol, a stock that Smith himself had highly recommended, in its first-ever investigative report. Although sharesleuth.com had raised legitimate concerns about Xethanol, backing up its claims with solid evidence, Smith nevertheless blasted the report and sided with the company instead.
“Listen, ever since we were notified on this misguided (at best) attack on Xethanol, I have been working with management and others to rebut the incredibly inaccurate slam job done by sharesleuth.com on XNL,” Smith wrote at the time. Meanwhile, “I am reiterating our strong buy (rating) under $8 here for your legacy portfolio. And to help remove the stock from short-selling inventory, I’m recommending putting a ‘good-till-canceled’ sell order for $30 on the shares you hold.”
Xethanol, which hit $15 at its peak, had fallen below $5 a share by that time. The stock continued to plunge in the months that followed, triggering a class-action lawsuit by Xethanol shareholders who later scored a multimillion-dollar settlement from the company. Although Xethanol tried to reinvent itself under a new name – and somehow secured a listing on the New York Stock Exchange for a while – the company wound up filing for bankruptcy, rendering its stock virtually worthless, late last year.
During a telephone conversation this week, Smith told The Street Sweeper that his firm originally purchased Xethanol itself but ultimately sold the stock after realizing that the company lacked a feasible business model.
Meanwhile, Smith has long since moved on and declared CHTL his new favorite in the microcap arena. He began recommending CHTL at 35 cents last summer and says that he bought 4 million shares of the stock on the open market himself. While some of Smith’s loyal fans have followed his lead, other investors – burned by his advice in the past – have decided to steer clear of all his stock picks.
“I followed Tobin Smith’s teasers for a while, doing a bit of my own gumshoeing,” one investor wrote after the Stock Gumshoe website scrutinized Smith’s endorsement of CHTL last summer. “His microcap picks were incredibly, staggeringly bad – the worst of all his bad stuff. In fact, I really don’t believe that any of the micros (save one) ever did anything but sink into oblivion.”
With CHTL more than doubling to peak at $2 by January, however, Smith won over plenty of others in the volatile penny-stock trade.
“Tobin Smith is putting his career and reputation on the line with his aggressive stance on China Tel Group,” Monster Stock Alerts wrote in late January, with the stock already falling from its recent highs. “Mr. Smith … has placed an $8 short-term target price on CHTL common stock. (He) will either become a hero or a prisoner!!! Monster Stock Alerts believes that he will indeed come out on top.”
Overextended
CHTL actually began trading around $1 a share – 25% above its current price – when it surfaced as a new telecommunications company a couple of years ago.
By then, regulatory filings show, CHTL had already agreed to give John Isaac (of the Isaac Organization) 5.5 million shares of stock for serving as an “independent contractor” for the company. Since then, CHTL has gone on to awardmillions of additional shares to other independent contractors and consultants – including members of its own management team – as compensation for their services.
“The company has no employees and limited cash,” CHTL explained on Thursday, “so historically has paid as many consultants and vendors as possible using stock.”
Of course, CHTL has been hoping for piles of cash all along. Within months of going public, CHTL was already hunting for partners willing to pay big bucks for a stake in the company. By October of 2008, the company’s regulatory filings show, CHTL had inked a “strategic frame agreement” that would allow an outfit called Runcom Technologies to buy 28% of its stock for $100 million. However, as reflected by CHTL’s dismal cash balance, Runcom never actually came through with those funds.
Undeterred, CHTL went ahead and promised $195 million for a 49% stake in Chinacomm regardless. CHTL made a small down payment on that big-ticket purchase in late 2008, regulatory filings show, and then issued a huge promissory note (originally scheduled to come due last month) for the rest. Meanwhile, CHTL arranged to sell almost half its stock to a firm called Olotoa Investments so that it could pay its upcoming bills.
When CHTL asked Olotoa to make a $50 million payment on its purchase in May of 2009, however, the firm failed to deliver. When CHTL asked Olotoa for an even larger $65 million payment two months later, the firm failed to deliver once again.
After waiting in vain for the promised funds to appear, CHTL finally cancelled the Olotoa deal – which Smith hadpreviously celebrated – in November of last year.
Today, Smith continues to praise CHTL’s “incredible” business model and “successful” management team. At the same time, however, he readily admits that the company has suffered some major setbacks in the financing arena.
“These are engineers and construction guys,” Smith told The Street Sweeper. “They’re not capital market guys.
“When it comes to capital structure,” he conceded, “they’re knuckleheads.”
CHTL has certainly treated its stock like an endless money supply. For example, regulatory filings show, CHTL issued more than 30 million shares of stock to consultants and contractors – causing its overhead costs to skyrocket -- during the first nine months of 2009 alone. Since then, those filings show, the company has issued millions of additional shares for similar consulting services.
With the stock blowing past $1 near the end of last year, CHTL insiders began to cash in some of their chips. Isidoro Gutierrez, identified in regulatory filings as CHTL’s chief administrative officer and uncle to two of the company’s top executives, sold at the highest prices – fetching up to $1.55 a share – around the time the stock hit its peak.
In early February, however, a mysterious Mexican trust holding 4.8% of CHTL’s stock (just short of the 5% stake required for detailed disclosures) reported the most lucrative sales of all. Between Dec. 17 and Jan. 22, the trust sold more than 2 million shares of CHTL – at prices ranging up to $1.91 a share – and pocketed almost $3 million in proceeds in the process.
Kenneth Waggoner, CHTL’s outside legal counsel, executed some well-timed sales as well. On the same day thatCHTL announced that Excel had reduced its original funding commitment, for example, Waggoner sold 15,000 shares of stock at just under $1 a share. Two days after CHTL learned that Excel would be unable to make its first big payment – and three days before the company actually disclosed that news – Waggoner followed up with an even bigger sale by cashing in 40,000 shares as the stock headed below 70 cents a share.
This week, CHTL itself downplayed those transactions.
“Since the insiders receive no cash compensation and devote their full attention to the company’s business, the company assumes the stock sales are to meet the personal obligations of the selling insiders,” CHTL stated on Thursday. Moreover, “those who have sold have only sold a small fraction of their total holdings.”
CHTL took a big hit in the meantime. By the time that CHTL officially announced that it had terminated its agreement with Excel on April 1, the company’s stock had already begun to plummet and ultimately closed that day at a four-month low of just 55 cents a share.
To be fair, CHTL has since made something of a comeback. Over the course of the past week, CHTL has jumped backabove 70 cents a share – soaring 17% on Thursday alone – with Smith loudly promoting the company.
“Spent day with George Alvarez, CEO of CHTL, talking EVERYTHING – including new debt financing, new Isaac equity deal, etc.,” Smith wrote in Twitter shorthand on Wednesday. “Our capital structure plan is coming together nicely.”
Smith’s “tweet,” suggesting that he might personally participate in a financing deal, triggered wildly mixed reviews in online chat rooms. While fans celebrated the update, expressing renewed confidence in their investment, skeptics ridiculed the news.
“If Toby says it,” one poster concluded sarcastically, “then it MUST be true."
* To contact Melissa Davis, the author of this story, please send an email to editor@thestreetsweeper.org.
