The Microcap Speculator

Yesterday I was flabbergasted to see what purported to be a press release from Eternal Technologies Group (ETLT.OB) entitled “Eternal Technologies Does Not Have Sufficient Assets in the United States to Post Bond to Stay Enforcement of Writ of Execution and Asset Seizure.”

Yet even a quick glance revealed that something was not right. First, the press release was not worded in the way a company — even one that has stumbled with the English language — communicates with shareholders. The whole press release seemed to be aimed at striking fear in ETLT shareholders, based on a threat that can best be described as a meaningless sideshow.

There were other red flags. The release was issued on Market Wire. There’s nothing wrong with Market Wire; its as good as any other wire service. But its not the one that Eternal Technologies uses. Every Eternal Technologies press release this year has been issued on Business Wire. And the bogus press release listed Angela Junell as the contact, instead of ETLT’s real IR contact, Annie Shi of Heron Public Relations Group.

Since I was 99% sure that the negative release was a hoax, as I posted in the comments here, I bought a lot of ETLT shares into the plunge this morning. Sure enough, later in the morning, Western Securities posted what it called a “Clarification.” It didn’t explain that the former release was fraudulent, but it at least correctly attributed Western Securities as the source of the ridiculous drivel.

To ETLT management I have this advice: you may not agree with the lawsuit, but either post the bond or pay up. For only $730,000 you can probably add 50% to your current market cap. and ensure your ability to continue to access U.S. capital markets. That’s a very small price to pay, so do it and move on.

DISCLOSURE: Long ETLT.OB.

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Eternal Technologies (ETLT.OB) shares have been hammered in the past few months, but there are two reasons that the future may be much brighter:

1. E-Sea spinout: Earlier this week, ETLT announced that it would spin out up to 70% of its E-Sea Biological Engineering Co. to shareholders, and list E-Sea as a separately traded company. E-Sea owns a Chinese patent for dialysis technology and produces and markets instruments for detecting breast disease specifically breast cancer by applying its image processing technology. According to the latest 10-Q quarterly filing, E-Sea had about $5.5M in revenues and $2.15M in net income for the first nine months of 2007. Medical device companies generally trade at far higher multiples than the other businesses in which Eternal Technologies is involved (agriculture and land leasing), so the spinout should unlock value. The company expects to complete the restructuring in the second quarter of 2008.
2. Institutional support: Sansar Capital Management, a hedge fund shop focusing on Asian investments, filed a Schedule 13G indicating that it had purchased 2,438,685 shares, or 5.18% of ETLT. This institutional support, from a fund believed to be savvy, should both lend support to shares and quell some of the doubts regarding the legitimacy of Eternal Technologies.

Add to this equation the facts that Eternal Technologies shares are oversold, that the company remains solidly profitable (though revenues did decline sharply last quarter), and that ETLT currently has far more cash than its total market capitalization. To me, the risk/reward for ETLT looks fantastic in the mid-term.

The rest of the news is just noise. Yes, there was a judgment entered against the company for about $730,000 in a Texas court related to an investment contract, but that is old news. The company had long disclosed the claim, had reserved against it, and has since filed an appeal. More importantly, $730,000 is less than 2% of the cash on ETLT’s balance sheet.

I bought more shares yesterday at $.55, and may continue to add to this position.

DISCLOSURE: Long ETLT.OB

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With little fanfare, Eternal Technologies Group: ETLT.OB has posted another quarter of good earnings. In a 10-Q filed today, the company announced earnings of approximately $1.92M, or $0.04 per fully-diluted share, on revenues of $11.08M. Both the top and bottom lines improved year-over-year, as did gross profits. Some of the impact was blunted by an increase in share count from 40.57M to 47.07M. This figure could moderate in the second half of 2007, as the company has announced it will buy back up to 5% of shares before year end.

Even after today’s positive movement (assuming it holds until the bell), Eternal Technologies still trades far below its cash and short-term investments. At current prices around $.63, ETLT has a market cap of just under $30M. Yet its balance sheet shows $26,223,055 in cash and $15,738,117 in short-term investments. Cash flows also improved markedly, as ETLT trimmed over $5.4M in inventories and $1.75M in receivables.

Bottom line: Eternal Technologies continues to post solid quarterly results, yet current prices give a negative value on the company’s profitable core operations. Barring any unforeseen revelations, I expect share prices to take out last year’s highs within the next six months.

UPDATE (8/13):  Digging a little further into the 10-Q, I note that the company included in selling and administrative expenses a $500,000 litigation reserve.  This appears to relate to a claim against the company on two promissory notes totaling around that amount.  According to the 10-Q, the case went to trial in May but no verdict has been returned.  Most companies would separate the reserve out and label it a one-time charge.  But for the reserve, ETLT would have earned an extra penny per share.

DISCLOSURE: Long ETLT.OB.

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A few interesting microcap charts:

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DISCLOSURE: I am long ETLT.OB, PTG, HIHO, UXG, GSS, WGDF.OB, GLDS.OB, and LTFD.OB. I have no position in AVCA, CXTI.OB,or PTSC.OB. Not a recommendation to buy or sell any security. For informational and educational purposes only.

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