Telestone Technologies revisited: SEC letters reveal doubts about revenues and receivables

Recently released letters between the Securities and Exchange Commission and Telestone Technologies Corp. (Pink Sheets: TSTC) show that regulators have significant concerns about the Chinese wireless communication company’s reported revenues.

The letters show that the SEC’s corporation finance division began questioning Telestone in September 2012 about its sales contracts with customers and its soaring accounts receivable. Telestone’s balance sheet at the end of that month listed its receivables at $276.3 million, before adjustments for doubtful accounts. That equaled three-fourths of the revenue it reported for 2009, 2010, 2011 and the first nine months of 2012.

The SEC asked Telestone to explain why it was so certain those receivables would be paid, given that its average collection time was rising, along with the amount owed. Last summer, after months of unsatisfactory answers, the SEC ordered Telestone to provide a schedule of all receivables originated between Jan. 1, 2009 and Sept. 30, 2012.

It said that schedule was to include:

  • The name of the customer
  • The date the final contract was signed
  • The amount due under the contract
  • The receivable created upon signing
  • The contractual terms for payment
  • The amounts and dates of payments

Telestone – which has been the subject of several previous Sharesleuth stories (see here here and here) did not provide the information, citing non-disclosure agreements. Instead, it simply submitted a list of receivables by geographic territory, with no additional details .

In November, the SEC told Telestone that unless it could show that the contracts and payments were solid, it should change its revenue-recognition method, restate its 2011 financials and announce that its results from prior years should no longer be relied upon.

Telestone did neither. So in February, the corporation finance division told Telestone it was ending its review and would take further action “consistent with our obligations under the federal securities laws.” That included posting the letters.


Telestone was one of 11 Chinese companies that stock promoter S. Paul Kelley helped to bring public through reverse mergers with U.S.-listed shell companies.

The SEC brought fraud charges last month against Kelley and four others in connection with two of those deals. It said in its complaint that Kelley and the others concealed the large ownership stakes they received in Guanwei Recycling Corp. (Nasdaq: GPRC) and China Auto Logistics Inc. (Nasdaq: CALI), artificially inflated share prices through manipulative trading, then reaped millions by selling much of their stock.

Kelley already has settled the case, agreeing to pay more than $6.2 million in disgorgement, penalties and interest.

A third company Kelley helped to bring public, Kandi Technologies Group Inc. (Nasdaq: KNDI) disclosed earlier this year that it was the subject of an SEC investigation.

(Mark Cuban, majority owner of LLC, has no position, short or long, in any of the companies mentioned in this story. Chris Carey, editor of Sharesleuth, does not invest in individual stocks and has no position in any of the companies mentioned.)


Telestone is based in Beijing and provides equipment and services for wireless communications networks. Its shares were delisted from the Nasdaq last July, after it  failed to file its audited financials for 2012, as well as its report for the first quarter of 2013.

Telestone’s stock, which once traded for $25, now trades for 15 cents. Its decline mirrors that of Orsus Xelent Technologies Inc. (Pink Sheets: ORSX), another of the Chinese companies that Kelley and his associates took public.

Orsus Xelent was delisted from the American Stock Exchange in 2011. At the time, it had more than $100 million in receivables — an amount equal to all of its revenue for the previous two years. AMEX officials concluded that Orsus Xelent’s impaired financial condition could make it impossible for the company continue operations.

Its stock, which peaked at $7.90, now trades for around 2 cents.


Telestone’s shares rose more than twentyfold from March 2009 to January 2010, in part because of the big gains it was reporting in sales and earnings. According to the company, revenues doubled in 2009, to $71.9 million, and profits rose 78 percent, to $12.5 million.

Telestone said revenues rose a further 83 percent in 2010, with profits rising more than 100 percent. Sharesleuth reported in the summer of that year that the company’s gains might be illusory, because it had not yet collected much of the revenue it booked.

Telestone said in response that most of its receivables were owed by China’s Big Three mobile-communication providers. It added that those companies had considerable financial resources and had never failed to pay their bills.

But our story also noted that the details it provided about its receivables did not square with the payables the Big Three communications companies listed in their SEC filings. At the time, Telestone’s receivables totaled $100 million. That included much of its revenue from the first two quarters of 2009 – making those receivables 12 to 18 months old.

China Mobile Ltd., which Telestone listed as its biggest customer, said in its SEC filings that it had no payables older than a year, and was not delinquent on any bills. China Unicom (Hong Kong) Ltd. which Telestone said was its second-biggest customer, reported in its SEC filings that only a small fraction of its payables were more than a year old.

In other words, either Telestone’s SEC filings were wrong, or its customers’ filings were.


The bulk of Telestone’s receivables were still unpaid by the second half of 2012, and the SEC began pressing the company for a clearer explanation of its billing and collection issues. In its initial letter in September 2012, the SEC’s corporation finance division Telestone to explain in detail why it had such a large accounts-receivable balance.

The SEC noted that the high balance was in conflict with other language in Telestone’s filings, which said it typically collected 60 percent to 70 percent of a contract’s value within nine months, and a further 20 percent to 30 percent within a year.

Telestone said in its response that the payment schedule was based on the terms stipulated in its contracts. It added, however, that its customers had their own payment processes, which were not always in keeping with those terms.

The SEC asked Telestone in November 2012 why it considered those contracts to have any “economic substance,” given its customers’ cavalier attitude toward the payment terms. Unswayed by Telestone’s response, the SEC suggested that it book its revenues according to the cost-recovery method rather than the completed-contract method. That method, based on cash receipts, would have slashed its reported revenue and profits.

The SEC also suggested that if Telestone was going to continue granting extended payment terms to customers, it should reclassify its receivables as non-current assets and remove them from working capital.

Last November, after another round of correspondence, the SEC told Telestone that unless it resolved the outstanding issues, it would have to restate its earnings for 2011 and disavow its results from previous years.


In January, Telestone finally filed what it said were its unaudited financial results for 2012. The company reported that its revenues fell by almost 50 percent, to $57.9 million.

Telestone listed a loss of $24.4 million, compared with a profit of $14.9 million in 2011. It was unclear whether the results included contributions from Sichuan Ruideng Telecom Corp., which it acquired in 2011 for $2 million in cash and 1.8 million shares of stock.

Telestone had blamed that subsidiary’s prior owners for the delay in its 2012 report, saying they failed to turn over records that auditors needed to sign off on the results.

It appears that Telestone either subtracted Sichuan Ruideng’s numbers from its overall totals, or made some other adjustment. The filing shows that Telestone’s revenue for all of 2012 was only a few million dollars higher than the revenue it reported for the first nine months. In addition, the revenue it said it derived from services rather than equipment sales was lower for all of 2012 than it was at the end of nine months.

Telestone said it had $268.9 million in assets at the end of 2012.  However, the bulk of that figure — $221.6 million – represented its accounts receivable. The filing showed that Telestone took a $30.3 million allowance for doubtful accounts that year, the biggest reduction it had taken since the receivables began piling up.

Telestone has provided no information on its 2013 sales or earnings.


Telestone gained a U.S. market listing in 2005, through a reverse merger with a small public company that had just emerged from bankruptcy and was essentially an empty shell. SEC filings show that 14 investors, including one of Kelley’s companies, his wife and several offshore entities, provided $50,000 in financing to aid the reorganization. They got the equivalent of 3.8 million Telestone shares in the merger, at a cost of 1.3 cents a share.

They also got warrants for an additional 1 million shares, exercisable at $3 each.

Another of the investors was a Hong Kong-domiciled entity called Winner International Group. Ltd. According to testimony in a Canadian court case, Kelley was Winner International’s vice president and had control over its brokerage accounts.

As we previously reported, Winner International secretly paid the U.S. legal, accounting, listing and investor-relations expenses for Telestone, Kandi, Orsus Xelent and New Oriental Energy & Chemical Corp. (delisted from the Nasdaq in 2012; now Pink Sheets: NOEC). In return, Winner International and its designees received large blocks of low-priced stock.

None of the Chinese companies disclosed their financial arrangements with Winner International in the SEC filings related to the mergers. Nor did they or the shell companies used in the deals disclose the transfer of shares in exchange for the aid it provided.

The SEC said a second Kelley company, Asia First Financial Inc., played the same role in later reverse mergers, including the ones that created Guanwei Recycling and China Auto Logistics.

Although Kelley neither admitted nor denied guilt in his settlement agreement, the terms prohibit him from disputing the factual allegations against him. Another defendant, Roger D. Lockhart, also settled with the SEC. He agreed to pay more than $3.1 million.


The SEC alleged in its complaint that Lockhart and two other defendants also manipulated Kandi’s shares, as part of a deal with its chairman and chief executive, Xiaoming Hu. The Jinhua-based company makes go-karts, electric cars and other vehicles.

According to the complaint, Lockhart and another defendant, George Tazbaz, met with Hu in China in September 2009. They agreed to get promoters to tout Kandi, and to manipulate the stock to bring the price above $3 a share within a few months.

The SEC said Hu agreed that Kandi would provide them with 350,000 shares to pay for the program. It said Tazbaz later provided that same number of shares, free of charge, to three stock promoters. One was Shawn A. Becker, another defendant in the case.

Tazbaz and Becker have not settled the charges against them. The final defendant, former stockbroker Robert Agriogianis, has agreed to settle and is cooperating with the SEC.


Eight of the 11 Chinese companies that Kelly helped bring public eventually made their way to the Nasdaq or AMEX exchanges. But five have been delisted and two others did reverse stock splits to bring their share price above $1 and preserve their listings.

Kandi is the only one of the companies whose shares are trading for more than their original market price. Kandi’s shares closed at $14.09 on Wednesday, giving the company a market capitalization of almost $575 million.

Kandi has not provided any details on the nature of the SEC investigation, titled “In the matter of Kandi Technologies Group Inc.”

Sharesleuth previously reported that the company appeared to have greatly exaggerated the number of electric cars it sold in the United States – its original market for the vehicles.

Kandi reported selling 3,510 electric cars in 2009 and 2010, primarily in the United States. However, our survey of all of the dealers listed on the website of its U.S. distributor found that fewer than 1,000 Americans had purchased the vehicles.

Kandi said in a letter to shareholders after our story appeared that it stood by its numbers. However, it never provided any evidence that our findings were wrong.

Sharesleuth later used customs records, which originated with the U.S. Department of Homeland Security, to test those findings. They showed that fewer than 1,200 Kandi-branded electric cars came through American ports from 2009 through 2011.

We currently are investigating other issues regarding Kandi’s sales figures. We will report those findings soon.






















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