Commentary on today's press releaseThere is a lot of info in today's press release. I will try to highlight what i think are the key points.
The TSE has advised the company that it has to hold the annual meeting by March 31st.
The Board is going to court on Monday to fight Mr. Yu. They are fighting for 3 things.
a) To postpone the annual meeting to June 13th.
b) To collect from Mr. Yu the $750k he owes for failing to buy HF.
c) To disallow Mr. Yu as a director based on the causes of his termination, the disruption caused to the company by him since his termination, and that certain shareholders acting with Mr. Yu are trying to take control of the company, and that this has not been disclosed as required by law.
It appears that neither the TSE, the Board or Mr. Yu will decide on the annual meeting. Rather, it is the judge who will decide.
Finally, on February 18th Loudon and FTI gained access to Heilongjiang. They have been 3 days as China is at least 12 hours ahead based on EST. They found three things with really one of them having the most profound effect on us the shareholders.
1) They believe HF sold fertilizer at favourable pricing, maybe even below cost in q2 and q3. This had an impact on profitability in Q2 and we saw it in thos results, but probably went to Q3 as well. The most important issue now is to determine if the receivable has been collected.
2) They said to us that Beidahuang won't do business with HF in December, yet they were bulking up on raw material. They may end up having to liquidate the raw material at no margin. This is a mixed good news as we probably have too much inventory and will have to go through the cost of selling it, but at least it is not cash sitting in a bank account that could be stolen.
#3 is the most damning issue, as they say they discovered documentation whereby 51% of Heilongjiang may have been sold to Beidahuang in 2012. If this is true, the lawsuits will be flying as the auditors and the Canadian board are facing serious liability (in addition to Mr. Yu). The best way Lowen and FTI can validate this information is to confirm the ownership at the local government office who is responsible for keeping these records. If the office shows HF as 100% owner of Heilongjiang than whatever document they found was never executed.
Regarding Mr. Yu, as a legal representative, he has certain legal obligations that can get him into hot water. The biggest one would be if the sale did happen, where are the proceeds? In China, it is a criminal offence for a legal rep to sell company property for personal gain. This is why a formal investigation has been opened by the police.
My final point on this allegation, is that it will no doubt impact shareholders equity, if true. For simplicity, I have assumed a $1.80 hit out of last September's $3.67 book value.
On a separate note, we can now say that all Canadian Board members have shown stupidity on their part in trusting Mr. Yu with everything. It would have been impossible to conduct business in China if Mr. Yu did not have the chops, but he did not need to have the original business licenses. If the Board had these in Canada, it would have expedited the transition to a new rep in case of dispute with Mr. Yu and avoided this huge delay. In particular, it will be at least 2 weeks in my opinion, before they get access to the bank accounts as Chinese banks still recognize Mr. Yu as the legal rep despite the announcements made to date.
From a Canadian judge's perspective, what Mr. Yu is doing in China will be very poorly seen by the court. It plays into the current Board's favour.
I thought it was interesting that Loudon has spent over 4 weeks in China. This is not what Chairmen do.
This is good news for Canadian shareholders, but in my opinion, he is highly motivated to do so. Loudon is obviously a fighter, both when he boxed and took on Microsoft and won, and today in dealing with Mr. Yu. However, as Chairman and Board member, he is also facing significant potential liability if this goes south as shareholders will go after anyone they can to recover lost monies. Given that he has a lot, he makes for an easy target. Thus, he has a huge incentive to get FTI in there and the place running normal.
My final point is that until the Board and FTI have complete control of the Chinese subs they cannot issue financial statements. Since they cannot issue financial statements, this stock will not commence trading until then.