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.
TIES TO MANIPULATION RING
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 Sharesleuth.com 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.)