CARPATHIA
http://www.smh.com.au/business/nexbis-has-explaining-to-do-20091113-ienu.html
For the past two years the Sydney technology company Nexbis has touted lucrative Asian government security contracts as the source of huge future long-term profits. Yet all may not be what it seems with the counterparty to the company's most lucrative contract.
Nexbis' market capitalisation hovers around $100 million, with more than $30 million of fresh capital raised last year from institutional investors, including QIC and Kinetic, on the promise of the 80 per cent margins on offer from sales of Nexbis' National Security Suite of secure identity document products.
But after starting this year with three big projects that one analyst thought might generate $100 million of profits next year, Nexbis is yet to deliver on its claimed potential.
In recent months the company has had two big setbacks. First, a project to provide drivers' licences in Vietnam, which Nexbis had announced as being at memorandum-of-understanding stage, has been put out to tender by Vietnamese authorities. This puts paid to Nexbis' hopes of securing the contract by its preferred method of direct negotiation.
In discussions with investors, Nexbis representatives play up their ability to leverage a network of "high-level government connections" to win big contracts across Asia.
A deal with the Department of Immigration in Malaysia last year was secured this way. The company predicted the contract, when running at full steam, would generate annual revenue of $60 million to $80 million.
It was not to be. In the second recent setback for the company a Malaysian Government reshuffle and budgetary belt-tightening led Nexbis to announce last month a "temporary halt" to supply its identification cards under the Malaysian contract "pending receipt of assurances of payment from the Government".
Even before this, questions were being asked about the Malaysian deal. Analysts had been expecting Malaysian revenue of about $25 million to June 30, and were shocked to read in the Nexbis accounts that it was only $3.3 million.
With Malaysia on ice indefinitely and Vietnam out to tender, investor attention at Nexbis' AGM later this month will no doubt centre on the company's third big contract. The deal relates to supplying customer identity cards to track purchases and refills of gas bottles under the Chinese national gas tank project. Nexbis has provided no hint that that contract, announced last November, is off track. Printing of identity cards reportedly began in April, and Nexbis booked sales revenue of $43.7 million from the contract in the June half.
So far so good, but the China cash has been slow to come in. At year end Nexbis' balance sheet showed trade receivables of $42 million, compared with $3 million the previous year. The bulk of the receivables related to the China contract. It was not until this week that the first payment against the receivables balance was confirmed, $10 million having been received.
Managing director Johann Young had sought to allay concerns over the receivables by pointing to the quality of the company's debtors. From the start, Nexbis identified the China deal as being a technology licence agreement with the "Chinese Government".
More recently when discussing this year's financial results Young was quoted as saying: ''How many companies can report a substantial growth in cash and profits, backed by safe government debtors?''
Unfortunately for investors, it not be this simple. The fine print of the Nexbis accounts suggests that the counter-party to the China deal is the Hong Kong-registered China Inspection True Product Technology Ltd (CITP), a fact Nexbis confirmed this week. To refer to CITP as an arm of the Chinese Government is perhaps something of a stretch.
According to US Securities and Exchange filings, CITP is just 12 per cent owned by a Chinese government agency involved in the claimed gas tank project. Its majority 70 per cent shareholder is the technology tiddler True Product ID of Pennsylvania.
TPID has for years pinned its hopes on providing security identification technologies to Chinese industry. Indeed, it was making claims regarding its involvement in the Chinese national gas tank project a full year before Nexbis arrived at the party.
It seems TPID's technologies are set to provide identification tags for the 130-million or so gas bottles in use in China.
This is not TPID's only Chinese contract win. Backed by the 96 per cent shareholder James Mackay, a Scottish-born businessman with a colourful track record in the internet porn and technology industries, TPID has followed in the footsteps of many Mackay companies in promising much but delivering little. At one point TPID said a contract with the China Painting and Calligraphy Organisation "had the possibility for greater potential revenues than the company's projected $1.3 billion gas tank contract with the Chinese government".
TPID has a market capitalisation of less than $1 million and is yet to report a single dollar of revenue from any source. Accounts for the nine months to March raise doubts regarding the company's going concern status.
Nexbis said this week it had received assurances from CITP that it had no connection with TPID. But curiously Nexbis also says it has no knowledge of CITP's ownership structure, raising questions as to how the company felt comfortable in saying the gas tank contract was with the "Chinese Government".
Nevertheless, if TPID's relationship with CITP is correctly recorded in SEC filings, the Nexbis team is to be commended on receiving even a $10 million payment in relation to the Chinese contract.
The quality of the Chinese contract lies at the heart of Nexbis' value and management credibility. Until the ownership of CITP is made clear, it is hard to give credence to management claims over the long-term value of this contract.
